Home loan affordability improves as prices fall after the RBNZ imposes LVR limits

Home loan affordability improved across most of New Zealand in January to its best level in five months as the Reserve Bank's speed limits on low deposit loans helped drive down median prices in the hottest markets.

An 8.6% fall in the national median house price improved affordability to its best level since August 2013 and was helped by a slight increase in earnings.

Affordability improved in 20 of the 24 housing areas measured in the Roost Home Loan Affordability reports.

Sales volumes and medians fell in the biggest cities in January, which was the fourth month of the restrictions of mortgages with loan to value ratios of over 80%.

A rise in average fixed mortgage rates in December in anticipation of a March hike in the Official Cash Rate was also a factor dampening demand.

However, banks have begun offering lower special fixed rates again through mid February as wholesale interest rates have softened in line with slowing emerging market economies and subdued inflation in New Zealand.

"Banks are keen to lend to borrowers with higher deposits and will do special deals for others with the right advice," said Roost Home Loans spokeswoman Colleen Dennehy.

The Roost Home Loan Affordability reports show national affordability improved to 57.0% in January from 60.7% in December after the national median house price fell to NZ$402,000 from NZ$427,000 in December. The reports measure the percentage of after tax pay needed to service an 80% mortgage on a median priced house.

The Roost Home Loan Affordability reports for January showed affordability for regular home buyers improved in all 24 cities except Whangarei, Napier, Wellington City and Invercargill.

It remained toughest for first home buyers on the North Shore in Auckland. It took 102.1% of a single median after tax income to afford a first quartile priced house on the North Shore in January, although this improved from 103.5% in December.

Fixed mortgage rates, which more than 50% of new borrowers now use, were flat in January, but have eased back slightly in mid February. Variable rates were unchanged, but are expected to rise in line with the Official Cash Rate. The Reserve Bank is forecast to increase the rate by 1 percentage point in 2014, and a further 1 percentage point in 2015.

Housing affordability has become a major economic and political issue over the last year. The Reserve Bank and Government agreed on a toolkit of 'macro-prudential' controls in May that would see the central bank impose limits growth in high loan to value ratio mortgages and force banks to hold more capital. Central and local governments are also moving to address housing supply shortages. The Reserve Bank's speed limit was applied on October 1.

For first home buyers – which in this Roost index are defined as a 25-29 year old who buys a first quartile home – there was an improvement in affordability in 21 of the 24 regions covered.

It took 47.5% of a single first home buyer's income to afford a first quartile priced house nationally, down from 51.5% a month earlier and the best level since July last year.  The most affordable city for first home buyers was Wanganui, where it took 19.7% of a young person's disposable income to afford a first quartile home. The least affordable was the North Shore of Auckland at 102.1%.

Any level over 40% is considered unaffordable, whereas any level closer to 30% has coincided with increased buyer demand in the past.

For working households, the situation is similar, although bringing two incomes to the job of paying for a mortgage makes life considerably easier. A household with two incomes would typically have had to use 37.5% of their after tax pay in January to service the mortgage on a median priced house. This is down from 39.9% the previous month.

On this basis, most smaller New Zealand cities have a household affordability index below 40% for couples in the 30-34 age group.  This household is assumed to have one 5 year old child.

For first-home buying households in the 25-29 age group (which are assumed to have no children), affordability nationally improved to 22.9% of after tax income in households with two incomes required to service the debt, down from 24.9% the previous month. The first quartile house price fell to NZ$275,000 from NZ$295,000 the previous month.

Any level over 30% is considered unaffordable in the longer term for such a household, while any level closer to 20% is seen as attractive and coinciding with strong demand.

First home buyer household affordability is measured by calculating the proportion of after tax pay needed by two young median income earners to service an 80% home loan on a first quartile priced house.

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Full regional reports are available below: