Home loan affordability steady in July, but under threat by August mortgage rate rises

The BNZ Home Loan Affordability measure was unchanged in July from June as interest rates were steady and house prices did not move. However, interest rate increases since the end of July and signs of renewed confidence in the housing market going into the spring open home season will keep the pressure on home loan affordability. The steady median house price and fixed mortgage rates helped leave the proportion of after-tax pay needed to service a mortgage on a median home at 56.5% in July. However, this is sharply better than the 77.1% seen a year ago and much improved from the record worst level of 83.4% in March last year, said interest.co.nz, which produces the series of national and regional reports for BNZ. Affordability improved in an unbroken run through 2008 as interest rates fell sharply and house prices fell. A rise in after-tax incomes because of wage inflation and a tax cut helped extend the trend. But that run of improvement ended in February, March and April this year as house prices stopped falling and interest rates began to bottom out. However, average fixed mortgage rates, which most home buyers use, have edged up in early August and there are signs of sales activity returning to the market as the weather improves, suggesting prices have at least stopped falling or may even rise slightly. "Affordability has improved markedly since last spring when housing market activity was in the doldrums and mortgage interest rates were still over 9%," BNZ Chief Operating Officer Stephen Mockett said. "However, fixed mortgage rates have risen slightly and any prospect of higher house prices could decrease some of that improvement in affordability heading to the summer," Mockett said. The REINZ median house price was steady at NZ$340,000 in July, while the average 2 year mortgage rate was unchanged at 6.25% by the end of July. The average 2 year rate has since risen to around 6.5%, although some banks, including BNZ, have cut their floating rates slightly to around 5.8%. 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 to take advantage of lower interest rates and look for bargains, which improved the number of houses sold and stabilised 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. Affordability remains slightly out of reach for most individual home buyers. 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. However, affordability worsened for a typical first home buyer. The BNZ Housing Affordability report's measure shows the mortgage servicing proportion worsened to 49.6% in July from 48.7% in June, largely due to a 1.7% increase in the first quartile house price to NZ$247,100. 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.