By Greg Ninness
Auckland housing is now the most unaffordable it has been for first home buyers since interest.co.nz began collating house price and household income data for its Home Loan Affordability Reports in January 2004.
The Home Loan Affordability Report for Auckland shows that a typical first home buying couple earning the median wage for their age group would now need to set aside more than half their after-tax income to meet the mortgage payments on a lower quartile-priced home.
The reports consider mortgage payments to be affordable when they take up no more than 40% of take home pay. The Auckland Affordability Report for March shows the mortgage payments on a lower quartile-priced home in Auckland would take up 50.12% of typical first home buyers’ after-tax income.
It is the first time that the mortgage payments on a lower quartile priced home have passed the 50% threshold since interest.co.nz began collating the data for its Home Loan Affordability reports in January 2004.
The reports provide a good measure of affordability because as well as tracking monthly movements in house prices, they also track the median after-tax wages of couples aged 25-29 in full time employment in locations throughout the country, via Statistics NZ’s Linked Employer Employee Data Series (LEEDS). They also estimate how much of their weekly income would be taken up by mortgage payments if they purchased a home at the REINZ’s lower quartile selling price for the same region.
|Separate Home Loan Affordability Reports are available for each of the following regions and cities (click to view).|
|Waikato/Bay of Plenty Regional|
|Hawke's Bay/Gisborne Regional|
|Central Otago/Lakes Regional|
|All of New Zealand
The reports also monitor movements in mortgage interest rates, and this allows them to estimate how changes in house prices, incomes and interest rates would affect housing affordability for typical first home buyers (click on the links in the box at left to read reports for individual districts).
In March the REINZ’s lower quartile selling price hit a new record high of $735,200 in Auckland, while the estimated combined median after-tax income for a couple where both were aged 25-29 and working full time in Auckland was $1605.90 a week.
The estimated mortgage repayments on a home purchased for $735,200 would be $804.86 a week, equivalent to 50.12% of a typical couple’s take home pay, and that is before other property related costs such as rates, insurance and maintenance, which may also be substantial.
More than one obstacle
However being able to afford the mortgage payments is just one obstacle first home buyers would need to negotiate to get into a home of their own.
They would also need to save a deposit.
The Home Loan Affordable Reports calculate how much typical first home buying couples would have accumulated to put towards a deposit if they saved 20% of their net income for four years and put the money into an interest earning bank deposit.
An Auckland couple earning the median wage for their age group would have saved $73,319 over four years, which unfortunately is just 9.98% of Auckland’s lower quartile selling price.
So not only would couples earning average wages struggle to afford the mortgage payments on a cheaper home in Auckland, they would also struggle to raise a sufficient deposit, and that in turn means they could struggle to find a bank willing to provide them with a mortgage, even if they believed they could afford the repayments.
This combination of factors is why so many younger people in Auckland appear to be giving up on the prospect of ever owning their own home and resigning themselves to the prospect of renting for the rest of their lives.
And it is not something people could have planned for.
From affordable to severely unaffordable in under three years
The reports show that housing in Auckland only moved into unaffordable territory for typical first home buyers in October 2014.
Prior to that mortgage payments on a lower quartile-priced home in the region were below the 40% of net income threshold that determines whether payments are affordable or not.
So buying a first home in Auckland has gone from being affordable to severely unaffordable in less than three years.
There’s a simple explanation.
Over the last three years Auckland’s lower quartile selling price has increased by $222,600, rising from $512,600 in March 2014 to $735,200 in March this year.
That’s an increase of 43.5%.
But over the same period, the median after tax income of Auckland couples aged 25-29 who both work full time has gone from $1502.09 a week to $1605.90 a week, up $103.81 a week or +6.9%.
Which means house prices have increased at a far greater rate than incomes.
That has been driven by two main factors: falling interest rates and strong migration-driven population growth, which means demand for homes has outstripped the supply of new homes by a considerable margin.
Over the last three years the average two year fixed mortgage rate offered by the major banks has fallen from 6.13% to 4.84%.
All other things being equal, mortgage payments should have come down, but they have gone up instead.
That’s because it is human nature that people tend to buy the best home they can afford, and for first home buyers that often means borrowing as much as they can.
So when interest rates come down, the amount they borrow goes up and that means they are prepared to pay more for their home, which pushes prices up.
The result is that buyers end up paying more for the property they want and take on more debt to do so.
That process has then been supercharged by the high levels of migration-driven population growth that has occurred over the last three years, with the growth in Auckland’s population exceeding the ability of the building industry to produce new homes.
Housing shortage growing
It is estimated that since 2010 Auckland’s housing shortage has grown to around 30,000 homes and is continuing to increase month by month as migration-fuelled population growth continues to hit new highs.
Of course this is not the first time housing has been unaffordable in Auckland.
According to the Home Loan Affordability Reports, mortgage repayments on lower quartile priced homes in Auckland were above the 40% of net income threshold for typical first home buyers between December 2006 and August 2008, peaking in that cycle at 45.67% in November 2007.
What was different back then was that mortgage interest rates were comparatively high, coming in at 8.13% in December 2006 and peaking at 9.64% in March 2008, before starting a steady decline.
Now the situation is reversed.
The average two year fixed mortgage rate hit its all-time low of 4.35% in May last year, and has since tracked up to 4.84% in March and is expected to keep rising.
That means the pain caused by Auckland’s housing crisis is unlikely to be restricted to the generation being locked out of home ownership.
There could also be tears in store for those who have borrowed heavily to buy Auckland property, either to live in themselves or as an investment to rent out, as they face a rising interest rate tide.
The problems that have been created in Auckland’s housing market are now long term and structural.
They are beyond the quick fix of policies that fiddle at the margins of the problem.