Affordability improves a bit in January after median house price fall

New Zealand home loan affordability improved slightly in January after a fall in median house prices more than offset a small increase in fixed mortgage rates, Interest.co.nz's home loan affordability report shows. Affordability improved most in Wellington and in the region around Queenstown as median prices slid the most there. However, Queenstown is still the most expensive housing market in New Zealand relative to incomes, but is now only slightly worse than Auckland. Affordability is only just better than its worst levels since early 2007 near the peak of the housing boom, the monthly measure calculated by Interest.co.nz found. "The sharp drop in house sales volumes and the fall in the median house price in January has helped affordability as home buyers held back because of uncertainty around tax reform," said Interest.co.nz Editor Bernard Hickey.

"New listings are also hitting the market as some landlords look to exit the market before property tax changes are announced in the May 20 budget. That may nudge house prices lower and further improve affordability through the middle of 2010," Hickey said. The Home Loan Affordability measure for all of New Zealand showed the proportion of a single median after tax income needed to service an 80% mortgage on a median house fell 1.5 percentage points to 62.1%. The median house price as measured by REINZ fell in January to NZ$350,000 from a record NZ$360,000 in December and remains 7.7% above its January 2009 trough of NZ$325,000. The average 2 year fixed mortgage rate, which has been among the most popular with borrowers in recent years, rose 5 basis points to 7.25% over the month and has now risen from an average 5.92% in February last year. Variable mortgage rates, meanwhile, were flat in the last month at an average 6.00% and are now at their lowest level in at least 7 years, meaning some borrowers may choose to go variable rather than fixed to improve their immediate affordability. "An expected rise in interest rates in the second half of 2010 will keep the pressure on affordability unless the fall in median house prices seen in January continues through the rest of the year," Hickey said. Affordability hit its worst level of 83.4% in March 2008 just after house prices peaked and 2 year mortgage rates were close to 10%. Many home buyers jumped in March, April and May of 2009 to take advantage of lower interest rates and look for bargains, which improved the number of houses sold and boosted prices. But short term mortgage interest rates flattened out in late March and longer term mortgage rates began to rise in line with rises on wholesale markets and higher local term deposit rates. House sales volumes flattened off in the last three months of 2009 as first home buyers and rental investors stayed away, leaving most of the activity at the top end for owner-occupiers using equity stored up during the 2002-07 boom or trading down to reduce debt. Volumes slumped in January. Affordability is now often out of reach for most home buyers on a single income. The threshold proportion of after tax income considered prudent to sustainably own a house is around 40%. Anything above that is starting to become unaffordable. Affordability for the typical first-home-buyer worsened slightly in January. The proportion of a single after tax pay needed to buy a first quartile house rose to 55% from 54.8%, which is the highest level since November 2008. The first quartile house price was unchanged in January at NZ$255,000. This measure is for a median income earner aged 25-29 buying a first quartile home. Interest.co.nz thinks the "˜affordable' threshold is 40% for such a home buyer. Meanwhile, affordability for households with more than one income improved marginally, but are near levels last seen at the end of 2008. This measure of a "˜standard typical household' found the proportion of after tax income needed to service the mortgage on a median house fell to 40.8% from 41.8% in December. This measure assumes one median male income, half a median female income aged 30-35 and a 5 year old child that receives Working for Families. This remains near the worst level of standard household affordability since November last year and significantly above the 35% trough seen in January, February and March, when buyer demand returned to the housing market. Any level over 40% is considered unaffordable for a household. Our measure of a "˜standard first-home-buyer household' found the proportion of after tax income needed to service the mortgage on a first quartile home rose was 26.1% in January, up slightly from 26.0% in December. It has worsened from its best levels of 22% in February and March when some first-home-buyers returned to the market. This measure peaked at 35% in June 2007. This measure assumes a first home buyer household includes a median male income and a median female income aged 25-29 with no children. Any level over 30% is considered unaffordable in the longer term for such a household. Southland remains the most affordable region for home buyers with a standard affordability measure of 35.3%, while the Central Otago Lakes (Wanaka and Queenstown) is the least affordable on 78.5%, although it is being quickly caught by Auckland on 75.1%. Central Otago affordability has improved from a peak of 137.6% in July last year as apartment prices have crashed in the wake of the collapse of several finance companies. Wellington's affordability improved to 61.6% from at 65.4% and Christchurch affordability was steady at 58.5%.