By Greg Ninness
Auckland’s first home buyers are the main beneficiaries of the recent falls in mortgage interest rates with rising prices in other regions taking the shine off the lower rates, according to interest.co.nz’s Home Loan Affordability Reports.
The reports measure how much of a typical first home buying couple’s after tax pay would be eaten up by the mortgage payments on a home purchased at the REINZ’s lower quartile selling price in each region.
Mortgage payments are considered affordable if they take up 40% or less of take home pay.
The Home Loan Affordability Reports show that mortgage payments have been under the 40% affordability threshold for typical first home buyers in Auckland since March this year. The most recent mortgage rate cuts saw affordability plunge to 35.77% in September, which was the lowest it has been since September 2014.
That was in spite of the fact that the REINZ’s lower quartile selling price for Auckland has increased by exactly 50% over that period, from $440,000 in September 2014 to $660,000 in September this year.
All of that increase occurred over the two years from September 2014 to September 2016, when the lower quartile price in Auckland increased from $440,000 to $655,000 and then flattened out over the next three years.
That means the improvement in affordability was mostly due to the decline in mortgage interest rates, with the average of the two year fixed rates offered by the major banks falling by 42.9%, from 6.13% to 3.50% over the same period.
To a much lesser degree, the improvement in affordability was also helped by a modest rise in wages, with take home pay for typical first home buyers in Auckland (based on the median pay rates for couples aged 25-29) increasing by 10.3% over the same period, rising from $1530.27 a week in September 2014 (for an Auckland couple where both work full time), to $1687.49 a week in September this year.
So the story in a nutshell for typical first home buyers in Auckland is that over the last five years, lower quartile dwelling prices have increased by 50%, take home pay has increased by 10.3% and mortgage interest rates have decreased by 42.9%.
The improvement in affordability occurred in all districts within the Auckland region and means that six of the region’s seven districts are now considered affordable for first home buyers, with the North Shore being the only district where mortgage payments on a lower quartile-priced home would take up more than 40% of typical first home buyers’ take home pay.
Lower mortgage rates also improved affordability in most of the rest of the country, with affordability improving in all but two regions (Manawatu/Whanganui and Otago), but the improvements in affordability have generally been more muted than in Auckland because in many regions lower quartile prices are still rising, while they have been largely static in Auckland for the last three years.
However housing is still considered affordable for first home buyers (with payments on lower quartile-priced homes taking up 40% or less of typical first home buyers take home pay) in all districts except Auckland’s North Shore and Queenstown.
In the Waikato, the mortgage payments on a lower quartile-priced home would take up just 22.64% of typical first home buyers’ take home pay in September, in the Bay of Plenty 24.99%, Wellington 24.88%, Canterbury 17.18% and Otago 19.53%, which means other regions still enjoy a considerable advantage over Auckland in terms of affordability for first home buyers.
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87 Comments
How about a longer time frame? Try 100 years for comparison.
Indeed. Most affordable, out of a period of insane unaffordability. Woo.
You cant compare across those time frames as there is so little in common between them. Incomes, discretionary spending, productivity, tax, population, priorities, pass-times, technology, global trade, immigration, currency, number of working adults etc. Its madness to contrast such different periods and expect to learn something useful about property prices today.
How many quotation marks should we put around the word 'affordable' here? If affordability is defined only by the weekly mortgage payments, sure, it has become more affordable. But saving up for that 20% deposit is the real pain.
Also, let's not forget that despite the record low interest rates, mortgage payments are higher (as a percentage of take home pay) then they were when interest rates were around 20%! Yes, I'll say this many times, just to get the message to as many people as possible.
"...over the last five years, lower quartile dwelling prices have increased by 50%, take home pay has increased by 10.3%" - this is the real issue. The wealth gap increased immensely in those five years, and only the rich are clapping. What a sh**show...
Affordable for the suicidally confident. During the GFC in 2008 interest rates got up to 11%. Not many FHB who could afford to pay 3x their current rates.
Just used the interest.co.nzmortgage calculator, for the mortagage we've just been pre-approved for, if the interest rate went from 3.99% to 11% the weekly payment doubles on a 30y mortgage. Yep, pretty sure that the vast majority of recent buyers would not be able to service that.
Glad to hear you're taking my advice then. You're welcome.
Lol. you have nothing to with do it.
Whatever you say ;)
Yeah, you really are that conceited aren't you.
That's a year earlier than planned pragmatist! ... you definitely have nothing in common with this govt.
and how many years does it take to pay off that ‘affordable’ mortgage!
I seem to remember a while back the mortgage basis for these reports was lengthened by 5 years, from 25 to 30years.
In some other overseas markets, banks have 'helped' borrowers keep payments 'affordable' by making mortgage terms of up to 40 years ...
Now now CN, We work from ~20 to 65.. so surely a 45yr mortgage is entirely appropriate.
FYI, https://m.oneroof.co.nz/news/36839
"12 percent of New Zealand people in their 70s are still paying off their mortgage"
Yes, I was being just a teency weency bit sarcastic :)
Maybe affordability was not looking good enough when measured over 25 years. So the measure had to be changed to improve affordability.
Better that than actually pushing for affordable housing.
Granted its a controversial change but the maximum working lifespan has also increased and 30-year loans are common now, so it's not without some underlying logic.
Addennum: And Greg hasn't updated the template for the affordability report, it still says in the definition 25 years, even though the calculation is clearly for 30 years. How many years has this little mistake been in there?
Bad Greg!
To buy a home at Auckland’s lower quartile price they would need a mortgage of $582,765.
They would need to set aside $603.68 a week to cover the mortgage payments, which would be 35.8% of their take home
pay
Interest.co.nzs calculator spits out $604 for 30years, or $673 for 25 years.
FYI, in the early 1990's mortgage terms were for 20 years. From extending the mortgage term from 20 to 30 years means that for the same monthly P&I payment, a borrower can now borrow 17% more than they could have previously. Since owner occupier buyers can now borrow 17% more, this has contributed to house prices rising by 17% (assuming the same 80% LVR).
And who's take home pay are we talking about? If it's household income, well, that's completely different now as it encompasses 2 full time working adults.
If households are paying 40% of their net income towards mortgage payments at current interest rates, this leaves significantly reduced financial flexibility for the household, especially if their incomes are not expected to rise substantially in future.
The most common reasons for mortgage default are:
1) loss of employment
2) relationship breakup (as 2 incomes are required to meet mortgage payments)
3) illness or death of household income earner (as 2 incomes are required to meet mortgage payments)
With the risks of an economic recession rising, there is a risk of rising unemployment, particularly those employed in the cyclical sectors of the economy.
Significantly higher interest rates are a lower risk variable in the current environment.
Unfortunately, it will take a severe financial shock to make many people realise just how overpriced property has become across the western world. The worlds central banks are leading us down a dead end road - one which I personally think is going to end badly!
The risk of not owning a home is also significant. You can be homeless with 3 months or less notice. Your rent can be increased.
Over time as the mortgage balance decreases, the risk also decreases. If you are renting, then they actually get worse.
Insurance can also mitigate against 2 of the 3 issues you raised.
Each geographical market in New Zealand is different. Owner occupier buyers should be aware that some geographical markets are overpriced (and have a higher risk of prices falling and could lead a buyer into negative equity if prices fall significantly), whilst some geographical markets are more affordable.
The most expensive geographical markets are Auckland and Queenstown.
The cheapest geographical markets are Invercargill, Whanganui, & Timaru.
Refer:
1) https://www.interest.co.nz/property/house-price-income-multiples
2) https://www.interest.co.nz/saving/rental-yield-indicator
Note: cheap markets have low house price to income ratios and high rental yields
In Auckland, there are some suburbs in the that have gross rental yields of less than 3% which seems extremely expensive to me.
For those pondering the rent vs buy decision.
https://www.youtube.com/watch?v=NZR_vMTLfIk
A good video explaining the rent vs buying decision, and focuses on the financial aspects of maximizing your future wealth. It is highly dependent upon:
1) future expected returns on the house
2) starting rental yields
3) expected annual growth rate of rents
4) future expected returns on the investment portfolio
It does not quantify the qualitative aspects of owning your own house such as peace of mind, etc
For those who owner occupier buyers who wish to make a fully informed financial decision, here is a free excel spreadsheet link where you can do your own rent vs buy decision and guide to completing the spreadsheet (note: it is US centric) -
1) link to spreadsheet - http://www.khanacademy.org/downloads/buyrent.xls
2) link to video explaining how it works - https://www.khanacademy.org/economics-finance-domain/core-finance/housi…
Note that cell B53 in the spreadsheet needs to be adjusted for lower selling costs in NZ (i.e. commission rates, marketing and legal). In NZ they are about 3-4%, not the 6% level in the United States.
For those owner occupier buyers in Auckland, when projecting the house price appreciation for the next 10 years, you may wish to consider comments from David Hisco (former CEO of ANZ NZ) made in May 2019.
"I think the Auckland housing market has a bit of a track record of going for a run and then plateauing, maybe falling off a little bit. So maybe we're into that seven to eight year period where the market will do nothing"
https://www.interest.co.nz/property/99499/anz-nz-ceo-david-hisco-says-a…
Note: if you assume zero growth for the next 10 years, then renting may lead to a better financial outcome compared to buying.
Some people have assumed that property prices in Auckland double every 10 years based on past price history - this assumption may be extremely over optimistic and could lead to a poor financial decision, and financial outcome in 10 years.
For sake of reference property prices can fall in a 10 year period. In Ireland they fell 3.6% per annum from 2007 to 2017 - that is a 40% price fall in the index from 130 to 90 - refer - https://tradingeconomics.com/ireland/housing-index
.
Aren't banks allowing 10% deposit at the moment? That coupled with lower interest rates would be a huge help for first home buyers in this tougher market... But when were interest rates around 20%? I must have missed that period...
Probably about 1988. That's roughly when they went up in Sydney, and I can recall a friend being most put out when her mortgage rate went from 14% to 18%. Mind you, she had borrowed $40k against her solitary salary to buy a $48k apartment in Bondi Beach ( where only mad Kiwis lived in those days!), so the change in rates was not that material. Today? That same apartment would probably need a mortgage of $400k.(PS: Just checked - make that $600k with a 20% deposit!) That's when a 4% mortgage hike against a sole wage would be noticeable, and why debt is so 'affordable' today.
I do struggle to see how borrowing to buy a property in 1980s is comparable to buying a property 30years later. And is it safe to assume that anyone taking out a home loan would expect interest rate fluctuations over the life of the 25-30 loan?
You asked a question; I answered it. That's all.
But as you have asked another question, I'll answer that as well - Yes.
I personally think mortgage rates will go an awful lot lower ( and that will prove disastrous), but of course, I could be wrong, and we could see 20% again...
It was a genuine comment, not a dig... Also another genuine question, why will lower rates prove disastrous?
The 20% you talk about is including inflation. Incomes also rose significantly over that period of time. It effectively inflated away many peoples debt.
Banks are allowing 10% deposit.. at a price (Low Equity Premiums, higher interest rates etc), and only if your income and credit history are good
I know someone who over the winter moved into a brand new house in Northland with a 10% deposit and interest only for 3 months.
We've been approved with a less than 20% deposit on two houses in the last month. Banks will only approve lending up to 90% of the valuation. We had to pay for valuations for both houses. In both cases the houses sold at auction for $100k and $200k above the valuation we got... we had no chance. Instead we're just poorer after paying for valuations and building inspections.
From information available on this website (Income from NZ Stats)
2004: Average NZ house price $260k, 5 Year Mortgage Rate 7.81%, Median Household Income $52k
2019: As Above, $597k, 4.29%, $98,621
By my calculation (interest only to make it simple), housing as a percentage of household income has fallen from 39% to 26% - 33% increase in affordability.
I appreciate some have it tough, but on aggregate the facts don't support this doom and gloom housing crash scenario so many of you obsess with.
(interest only to make it simple)
And what does your calculator say if you keep it realistic and use principal repayment as well?
Part of the 'affordability factor' has to be repayment of the principal as well? There another $337,000 worth of debt to be repaid in 2019 that wasn't there in 2004? Another 7 years worth of 'affordable' repayments if the change in the median wage over that time is any judge...
"(interest only to make it simple)"
Right, so totally divorced from the reality of home ownership.
2004 p&i = $26,388 pa (45.8% of HI Income)
2019 p&i = $38,970 pa (39.5% of HI Income)
Next?
1987 vs 2019
Avg. weekly take home pay:
$365 vs $801
Avg. house price:
$88900 vs $687000 ($1027000 in Auckland)
Interest rate on mortgage:
20% vs 3.35%
Repayments weekly (80% LVR, 20 year term):
$281 vs $723 ($1097 in Auckland)
Repayment to income ratio:
77% vs 90% (137% in AKL lol)
How bout we go for median to median comparisions, or average to average. Comparing medians to averages is not exactly a fair comparison when we know neither house prices or incomes are normally distributed.
My house price was median, not average. On such large samples you could interchange with minimal statistical error.
CJ, where do you see the average NZ house price of $687k, source? I have some average NZ houses to sell you.
I used data from Interest to keep it neutral and verifiable. Also, household income is more applicable as the demographics have changed a lot (more dual income households).
15 Years is a sensible comparison, 1987 is a world away in so many ways. The reality is, the facts don;t back your case on affordability
1987 vs 2019
Avg. weekly take home pay:
$365 vs $801
Avg. house price:
$88900 vs $687000 ($1027000 in Auckland)
Interest rate on mortgage:
20% vs 3.35%
Repayments weekly (80% LVR, 20 year term):
$281 vs $723 ($1097 in Auckland)
Repayment to income ratio:
77% vs 90% (137% in AKL lol)
So... One could say that the facts *do* support this doom and gloom housing crash scenario many of us obsess with.
and that average $88900 house price would not have carried a mortgage which would have taken 25 - 30 years to repay
You see, the gloomy are always bearish about house prices and affordability. It's more a mind-set than any fact-based conclusion. Here is Bernard Hickey ringing the alarm bells in 2009.
https://www.interest.co.nz/news/44330/opinion-why-golden-oldies-are-wro…
Since Bernard Hickey was wrong, he was discredited by many people. That is entirely understandable. However, when the financiers come out and talk against their own vested interests, that is something to take note of. They see information and data that the general public don't get to see. This is the only time that I can recall that the bankers were speaking out publicly on house price levels in Auckland, so in order for them to speak out, there must have been genuine concern. For those who may have missed the comments and are interested, here are links to their comments for your reference.
1) David Hisco (former CEO of ANZ NZ) in 2016 - https://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=11…
2) Don Brash (former governor of RBNZ) in 2016 - https://www.nzherald.co.nz/nz/news/article.cfm?c_id=1&objectid=11672584
From David Hisco earlier this year:
https://www.interest.co.nz/property/99499/anz-nz-ceo-david-hisco-says-a…
CourtJester, you manipulate the figures to suit your narrative... Take home pay for the average two person working family $801? Pfffft....
CJ was comparing average take home pay for an individual in the 2 time periods. Why would you compare household income? You're effectively comparing 1 person vs 2 people working, 40 hours vs 80 hours. Household working compositions have changed over the last 30 years, so this measure is distortionary.
Because reality is today that two people are more than likely to be working in a household, especially in a FHB situation. Entirely possible that in the 80's FHB's were both working which would have made affordability even more favorable then so why does court jester choose to base his facts on only one person working in 2019 instead of basing the 1980's FHB's on two people working? Because it suits his doom and gloom narrative...
But we're on the topic of affordability, how is 2 people working to achieve the same outcome as affordable as 1 person working? Yes 2 people could have been working in 1980's, likewise 1 person in 2019 could be working. But this creates a distortion that can be twisted to suit one's narrative.
Comparing Average Wage to Average Wage against housing costs is the best measure.
"But this creates a distortion that can be twisted to suit one's narrative" - exactly my point but put more articulately...
Good data thank you.
May I add: wages thereby up about 90%
Average house rise 233%
But it's not so bad Mike!!! If you focus on Household income, technically wages are up 180% (wages x 2). Then you throw in some interest rates drops and voila houses are affordable.
DGMs will surely malfunction after reading this headline
DGMs tend to read beyond the headlines at least.
Yes. After reading the headline they skip straight to the comments section to take solace in their fellow DGM's baseless promises of house price collapse.
Hi Due Diligence,
This is a serious question, as it would be be wish to return to NZ one day.
When I was in NZ 1 1/2 years ago I had a family of 5, only I was working, and I was making for NZ, a fairly good wage ($85k). With no savings, for a deposit (or no weathy parents) and debt of approx $8K (Credit Card) our family after rent and bills was left with $50 per week. I was really keen for a house- my question is this... based on 20% deposit required on the average NZ house price, what would you advice someone in my position should do, to get that deposit?
Speaking to mortgage brokers, they were unable to help...
Well you're going to struggle to get an answer from the banks even with a decent deposit if you're on a single income. As i experienced when I bought 2.5 years ago while my wife not working for new baby reasons. I was on a little under 20% less than you, buying at lowish $200's with a 25%+ deposit and the only place that would lend to us was a Credit Union.
They cited the "Responsible Lending Code".
That means the improvement in affordability was mostly due to the decline in mortgage interest rates, with the average of the two year fixed rates offered by the major banks falling by 42.9%, from 6.13% to 3.50% over the same period.
Debtors refinancing a mortgage at a lower rate will have to pay the present value of the cash flow of the mortgage payments greater than those of the higher rate. Formula
Wow.....you can't make this stuff up
While I accept that there are affordability issues - especially in Auckland - this is pleasing news for potential FHBs.
RBNZ data shows that over 75,000 mortgages were to FHB over the past three years and, conservatively assuming that each mortgage on average is 1.5 people, then over 110,000 people have got into their first home in the past three year. I look to see that figure increasing as it is currently doing.
Now is a great time to be buying your first home or buying an investment property.
Interest rates are at a historical low and will be down for a long time.
It is cheaper to buy than rent in a lot of cases!
You can’t complain about getting the deposit together as it has been made easier by the government grants and being able to use KiwiSaver money.
I'd be really concerned if it is cheaper to buy than rent. Must be something wrong for that to be the case.
DaveB, with rates around 3.5% p.a. There are so many locations that have houses cheaper than renting.
We have bought top property in ChCh in the past year with returns around 6% so clearly cheaper to buy than rent.
They are in excellent areas as well, not cheap areas.
I am not talking about Auckland where the market to my mind is difficult to justify investing in yield wise.
But the crime in Christchurch is unreal at the moment, you'd be mistaken for thinking it's a city in South Africa.
NZDan, personally haven’t had any crime happening around myself.
You are saying that there is less crime in Auckland, that has the high prices?
Rubbish.
- Auckland (2017 population 1,657,000)
Assault - 6598, Sexual Assault - 614, Abduction - 91, Robbery - 1,231, Burglary - 20,930, Theft - 46,612
- Christchurch: (2017 population 387,000)
Assault - 1785 (7497), Sexual Assault - 229 (961), Abduction - 19 (79), Robbery - 280 (1176), Burglary - 7461 (31,336), Theft - 15,143 (63,600).
Auckland's population is roughly 4.2 times Christchurch's population. In the brackets in bold, I've put the extrapolated figures based on Christchurch having the same population as Auckland (multiplied out by 4.2).
You're less likely to be abducted or robbed which is a good thing i guess?
The skinheads are moving back to CHCH from the south... Timaru crime rate is down.. wonder why!
NZDan, all your figures are saying is that there is far more crime in Auckland.
We all choose where we want to live, our perogative.
Personally don’t hang around people that commit crime and never affected myself.
ChCh is all good.
Dp
There are something like 52 murders a day in South Africa. Hilarious comment but Christchurch is not comparable to South Africa at all. Take it from someone who was born there...
If Christchurch was such a wonderful place to live it would have a much bigger population. The reality is it is isolated from the powerhouses of New Zealand, it has terrible weather, it is prone to earthquakes some of which have been unfortunately severe and it attracts gang members and right wing people who love to hassle people they do not like. It is a small town and will always be one. Hence it has cheap housing and cheap rentals that are stagnating as inflation bites into them. People vote with their feet and they have certainly voted hard in Christchurch.
You need to factor in rates , insurance and maintenance to have a fair comparison. You also need to look at it from a cashflow point of view for it to be ’cheaper’. I get that it makes financial sense to buy but question how it can be less per week than renting if you were to buy today.
DaveB, if you want to believe that it is cheaper to rent than buy, then maintain that thought and keep renting.
While tenants think that, there will always be plenty of tenants to fill landlords houses.
If it was cheaper to rent than buying with all costs everywhere then we wouldn’t be buying, as we would be negatively geared, however you believe what you want to!
You need to get the right advice without believing everything you read from the doom and gloomers.
Sept sales up in Auckland cf 2018.
3m sales down
Could you please cite figures for sales priced below lower quartile in 2014 compared to 2018.
Rest assured there are a lot fewer simply because average price is a lot higher.
So obvious should not need continuous repetition but a lot of people have been priced out of market. Hence 12 month sales rate in Auckland to end of August was lower than 12 months to end May. Thus: interest rate cuts make b all difference as IMF and BIS keep trying to tell central banks
I dont wish this on anyone , but I can remember when interest rates were between 22 and 25% on my mortgage after the Asian Financial Crisis and there was a run on the currency .
I dont wish to contradict but are you sure Boatman, I thought they got to 11 percent in late 90s
Still highly unaffordable, banks should give you money back for borrowing with these prices.
Well the headline 'Auckland now affordable', not just more affordable, was certainly good as click bait.
And it is a good reminder as to where Interest.co's real 'interest' lies, not that there's anything wrong with that, but I used to think they were more balanced.
It is amazing how you can make problems go away if you redefine words.
Household income used to mean one person working a 40 hour week.
Dwelling was three bedroom home on a large section, not the increase of apartments or small houses on postage stamp size sections that have skewed the lower quartile house size and hence 'affordability' of such housing.
And affordable meant 3x median multiple.
Food Banks have never been under so much stress, and emergency benefits has skyrocketed, but we also have record low unemployment, and 'affordable' housing - so all must be good.
Yes, indeed, statistical legerdemain as usual nowadays.
Affordable being most easily of words.
Auckland sales 32% lower in 2018 than 2013. People vote with their feet (by not walking towards exorbitant priced shacks)
Try getting a solid figure on what average individual earning is in Auckland and how much it has risen, relative to average house prices, since 2013.
As many readers have pointed out, "affordable " has to refer to a bit more than payments at current are of interest.
Average length of loan? TOTAL repayments, with inflation taken into account?
No inflation to erode debt either.
Rental prices are rising far faster than benefits or av earnings.
So, 3 guesses why food banks are in so much greater demand??
"Afordable" by borrowing more to buy it? Yeah right....
Sales, residential in Auckland $650-850k: 12m to end August 2018: 5939
12m to end August 2019: 5927
Interest rate cut impact? Pretty minimal.
By way, 12m series ending in May 2019, compared to end of August 2019, showed a 5971 v 5927 balance.
Same metric comparison in 2018 showed: 5784 v 5939 balance
Point being, sales rose in that 3m block in 2018 but fell in same period of 2019.
Higher the price bracket up to $2m, more sales fell, in % terms
FHB lending has risen a lot in last year, others (owners and investors) flat to negative
Not really saying we want FHB to borrow even more are we?
What I hear from owners I door knock is that they were thinking of moving but have decided to do place up instead.
Akl affordable? Yeah, tweak the math however you want using some ultra bad comparisons. A year or so ago gov was trying to slow down the housing market because it was the most unaffordable in the WORLD related to average income. You telling me this has changed in a few months just because interest rates have gone down in order to try and now promote housing sales. Talk about a flip flop and why people just laugh at gov policies as the direction/goal will change again in a few months.
Akl especially is STILL a place where you have horrendously overpriced, underinsulated, rotting, moldy 100 year old homes being sold for more than anyone should EVER be paying for them and the lower interest rates will only encourage prices to go up further for crappy housing that should just be bulldozed. I feel bad for people that have to live there. These people who the banks let buy more than they should just because interest rates have dropped will be paying off their mortgage for many more years than their parents ever did.
More affordable? Has not been for years and is not now if anyone has done a finance 101 class.
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