First home buyers being squeezed between rising lower quartile housing prices & higher mortgage interest rates, putting a dampener on their home ownership hopes

By Greg Ninness

Rising house prices and rising mortgage interest rates pushed the dream of home ownership further out of reach for aspiring first home buyers in November, according to interest.co.nz's Home Loan Affordability Reports.

The reports found that the Real Estate Institute of New Zealand's lower quartile selling price rose in seven of 12 regions in November (Northland, Auckland, Waikato, Bay of Plenty, Hawke's Bay, Wellington and Southland), was unchanged in two compared to October (Manawatu/Whanganui and Otago), and declined in three (Taranaki, Nelson/Marlborough and Canterbury/West Coast).

But even more significant was the fact that in every region where the lower quartile price rose, it hit a record high. And in Manawatu/Whanganui and Otago where the lower quartile price was unchanged from October, the October price was a record high, meaning the prices in those two regions remained at the record highs set the previous month.

Those figures suggest upward pressure on housing prices at the bottom end of the market at the start of summer, with the price rises being particularly strong in Northland where the lower quartile price increased from $350,000 in October to a record $385,000 in November (+10%,) and in the Bay of Plenty, where the lower quartile price rose from $420,000 in October to a record $449,000 in November (+6.9%).

In Auckland, where housing pressures are greatest, the lower quartile price increased from $660,000 in October to $680,000 in November, equalling the record high set in March last year.

That means lower quartile prices in Auckland have stopped within a hair's breadth of breaking out of the narrow band they have remained within for the last two years.

The upward pressure on lower quartile prices would be concerning enough on its own for hopeful first home buyers, but their effect was magnified by the fact that mortgage interest rates also started rising in November.

The Home Loan Affordability Reports track movements in the average of the two year fixed mortgage rates offered by the major banks, which hit a low of 4.23% in October after declining steadily since May last year.

But in November the average two year mortgage rate did a U turn, rising to 4.29%.

The combined effect of the higher prices and higher interest rates pushed up the costs of servicing a mortgage on a lower quartile-priced home, which is the price point at which 25% of sales would be below and 75% would be above, representing the most affordable end of the property market where first home buyers tend to be most active.                                                                                                                      

The Home loan Affordability Report for Auckland estimates that the combination of higher prices and higher interest rates would have pushed up the mortgage payments for typical first home buyers in the region by an extra $27.43 a week, from $661.66 in October to $689.09 in November.

That increase is particularly significant because the Home Loan Affordability Reports consider mortgage payments to be affordable when they take up no more than 40% of after-tax pay.

The reports calculate that in October, Auckland was on the verge of becoming affordable again for first home buyers, with mortgage payments on a lower quartile-priced home taking up 40.57% of typical first home buyers' after tax pay.

But the increase in lower quartile prices and interest rates in November meant mortgage payments would be taking up 42.18% of typical first home buyers' take home pay, pushing payments squarely back into unaffordable territory.

In Northland typical first home buyers faced paying an extra $42.05 a week in mortgage payments in November compared to October and in the Bay of Plenty they faced paying an extra $35.79 a week.

Across the entire country the average increase in mortgage payments for typical first home buyers was $13.85 in November (full regional and district affordability reports are available by clicking on the appropriate links in the box at left).

With housing market activity about to come to a standstill for the Christmas/New Year break and the outlook for both house prices and interest rates uncertain for the New Year, the latest affordability figures could be the Grinch that stole this year's Christmas cheer for many hopeful first home buyers.