NZ home loan affordability flat as house prices stagnate

Home loan affordability was flat across most of New Zealand in September after the national median house price and interest rates were unchanged.

The Roost Home Loan Affordability Reports showed an improvement in a bare majority of regions, including the North Shore of Auckland, South Auckland, Wellington and Whangarei, but not in central Auckland, Christchurch and Hamilton, where prices rose.

The national median house price was unchanged in September at NZ$420,000 and the average two year fixed mortgage rate was also unchanged at 6.13%, although they have dropped since the end of October to under 6%.

The Roost Home Loan Affordability reports show national affordability for typical buyers was unchanged at 61.1% in September from August. However, the measure for first home buyers showed a slight improvement because of a fall in the price of cheaper homes.

A new report for Wairarapa was launched in September. It showed affordability for typical buyers was at 36.6%, significantly below the national measure.

Affordability may improve in October and November if house prices remain stable, given the fall in fixed mortgage rates in recent weeks as the inflation outlook has subsided. Banks have been more aggressive in recent months in offering cut-rate longer-term fixed mortgage rate deals, passing on the benefits of low international and local funding costs. Banks have cut their best advertised two-year mortgage rates to around 5.75% in the last week.

It was toughest for first home buyers on the North Shore of Auckland, where it took 108.6% of a single median after tax income to afford a first quartile priced house, albeit down from 109% the previous month. South Auckland was only slightly less expensive at 97.4% and was more expensive than Queenstown at 88.3%.

Housing affordability has become a major economic and political issue over the last two years. The Reserve Bank and Government agreed on a toolkit of 'macro-prudential' controls that would see the central bank impose limits growth in high LVR mortgages. Central and local governments are also moving to address housing supply shortages. The Reserve Bank's speed limit was applied on October 1 and said this week it helped halve house price inflation to 5% over the last year.

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 a improvement in affordability in most regions covered and the national measure also improved because of a fall in the cheapest quartile of houses.

It took 49.3% of a single first home buyer's income to afford a first quartile priced house nationally, down from 51% a month earlier.  The most affordable city for first home buyers was Wanganui, where it took 16.8% of a young person's disposable income to afford a first quartile home.

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 40.1% of their after tax pay in September to service the mortgage on a median priced house. This is unchanged from August.

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 25.3% of after tax income in households with two incomes required to service the debt from 25.2% the previous month. The lower quartile house price fell to NZ$279,500 from NZ$287,500 in August.

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.