Rising incomes had the biggest impact on affordability for first home buyers last month

Property / news

First home buyers benefit from rising incomes in a stalled property market - but only slightly

17th May 23, 12:01pm by Greg Ninness

interest.co.nz Home Loan Affordability Report
For Typical First Home Buyers
April 2023

Rising incomes had a bigger impact on housing affordability for first home buyers than the movements in either house prices or mortgage interest rates last month.

With the housing market almost stalled in April, there was only modest movement in prices at the bottom end of the market. The Real Estate Institute of NZ's national lower quartile selling price declined from $585,000 in March to $580,000 in April.

However that remains down by $60,000 compared to April last year, and down by $90,000 compared to the market peak in November 2021.

The movement in mortgage interest rates was also marginal in April, with the average of the two year advertised fixed rates offered by the major banks rising to 6.50% in April from 6.44% in March.

However, that was well up from 4.96% in April last year, and very strongly up from the cyclical low of 2.52% in May 2021.

The combined effects of the monthly changes in mortgage rates and lower quartile prices had a minimal impact on mortgage payments, with the payments on a home purchased at the national lower quartile price with a 10% deposit declining by $2.54 a week compared to March, while the payments on the same home purchased with a 20% deposit would have declined by $1.72 a week.

The biggest impact on affordability in April came from the ongoing rise in incomes.

The Home Loan Affordability report tracks the combined, median after-tax pay for couples aged 25-29 who work full time, and this increased from $1946.67 in March to $1952.82 in April, an increase of $6.15 a week.

When the slight decline in mortgage payments is combined with the increase in after-tax pay, first home buyers with a 10% deposit would be better off by about $8.69 a week, while those with a 20% deposit would be better off by $7.87 a week.

That's not a lot, but in the current high inflation environment every little bit helps.

The tables below show the main affordability measures for typical first home buyers with either 10% or 20% deposits, in all significant urban districts throughout the country.

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43 Comments

by IT GUY | 17th May 23, 12:21pm 1684282869

Its going to take another 25% fall to move the dial, eventual falling interest rates will help if they still have same income.

by HW2 | 17th May 23, 8:56pm 1684313800

Commenters on interest.co should be the most up to date and cutting edge informed home buyers. First to sense the trends but I have a bad feeling that they will be the last to buy. They've been brainwashed either by their own BS or by that of others here and the constant back slapping after the market falls.

by Shaft | 18th May 23, 11:13am 1684365209

HW2 You're a first class royal idiot!

People like me and I suspect others have our arses covered by spreading or risk between property, cash, and TDs

As such, for example, the smart people like me sold Half our newer stock of houses at near peak Nov 21 and kept our older stock ( that can take a bigger hit without loss) to keep our property options fluid. The income is then split into TDs (AA rated, 6% @12 MONTHS) income and cash to pounce again.

Thus, in this scenario I would favour buying on the upside of the bottom rather than near an imaginary botton that may well ( in this random environ) drop more.

And the last thing I would do is build house in this market when your main competition for sellers is the government, inflation, and over leveraged mortgage Muppets being in a rising OCR environment.

But... I'm a moron!

by Treliving | 18th May 23, 10:26am 1684362386

I disagree. Having only been in New Zealand for 3 years, the comments here, including yours, have given me an alternative view of what is being portrayed in the wider media. It has kept my FOMO at bay, stopped me from purchasing a New Build back in 2022, and put me and my family in a great position to purchase in the near future. The comments sometimes get a bit childish when you all bicker after a few glasses of Pinot Noir on a Friday night. Just remember that new migrants and first-home buyers (which I imagine is more than you think looking at these comments) follow this feed and take your own comments into account as well to form thier opinion. At the end of the day, from what I can see, this is a forum with a breadth of knowledge and experience from people of all backgrounds in the Kiwi property market. I have not been brainwashed, I think i'm now well-informed and ready to buy when the time is right!

by Shaft | 18th May 23, 11:12am 1684365139

Nice one. TAKE FROM THE COMMENTS WHAT YOU NEED!

RULE ONE - HAVE FUN IN YOUR LIFE.

RULE TWO - EARN MONEY PREFERABLY WHILE HAVINNG FUN. AND SAVE. FRONT LOAD THIS! COS WHEN YOUR OLD EVERYTHING CHANGES AND MONEY BUYS RELIEF.

RESULT - IF YOU SUCCEED AT RULE 2 YOU WILL FIND RULE 1 EASIER..

by Crayhunter | 18th May 23, 12:40pm 1684370445

HW2 I would politely disagree with your comment. I have been reading these blogs daily but don't often comment. I think discussions here are a good indication of the market sentiment. My personal view is that now is a very bad time to build or invest in housing at all as inflation is still high and the only tools NZ has is to raise the OCR...... we all know what this will do to the house prices. I do appreciate hearing opinions from both sides of the fence thou so i thankyou for your post.

by HouseMouse | 17th May 23, 12:31pm 1684283499

Wouldn’t most FHBs with a 10% deposit need to pay a mortgage rate north of 7%?

by ShoreThing | 17th May 23, 1:56pm 1684288619

Read the note on the table - the calculations assume paying a low-equity premium.

by HouseMouse | 17th May 23, 2:13pm 1684289600

Ah, thanks for pointing that out!

by Caughtinthemiddle | 17th May 23, 12:34pm 1684283694

The fundamentals just don't stack up - not yet at least.

by Treliving | 17th May 23, 1:12pm 1684285969

Agree that Auckland house prices need to drop by at least 20% before I can afford to buy a home as a first-home buyer with a 20% deposit. I desperately want to buy a home, and banks, and mortgage brokers, are telling (very pushy!) me that I can only afford to buy a home over $1.1m. However, my monthly mortgage payments would be much higher than my current rent. I would rather give my money to a decent landlord than to the banks in the current situation.

My current rent is $3,400 per month for a property with an RV of $1.2 million. If I were to buy this property with a 20% deposit, my monthly mortgage payments would be at least $5,556 per month, including $3,239 in interest.

Anyone with sense would sit tight renting instead of buying a home at the current prices. I would say that I speak for the majority of migrants who are in the same position. And every month that goes by adds to the savings so it's a win-win.

by morepork | 17th May 23, 4:15pm 1684296920

For comparison, here's the report from Nov 2021, the peak of the market:

https://www.interest.co.nz/property/113833/prices-bottom-market-continu…

Nationwide, time to save a deposit has decreased significantly, by 1.4 years for 20%, 0.7 years for 10%, and the percentage of after tax pay needed to service the mortgage has only increased a little from 33.8% to 34.6% for a 20% deposit, and 43.7% to 44.0% for a 10% deposit.

With falling prices and rising wages and interest rates, it's starting to hit the point where the calculus at purchase time is better now. When factoring in interest rate risk it's been a better time to buy than at that peak for some time.

Houses are getting more affordable, and that has a lot of benefits for the country, particularly our young people.

by Chaosinflesh | 17th May 23, 12:47pm 1684284435

Here's a question: is the average FHB a dual-come 25-29 with no kids? I doubt it - this is highly idealised.

Until the families with kids can afford to buy, the market will keep dropping.

by malamah | 17th May 23, 1:51pm 1684288314

Damn. 70 weeks to save 20% deposit. May as well keep going and buy when you're at 100% at that rate! Debt free in 7 years.

Edit: I see you must've meant 1.4year decrease LOL any opportunity to be sarcastic on this forum gets me going...

Edit #2: these calculations are assuming the FHB has been saving for that amount of time, at that income, and not lost equity investing in the last year. The figures themselves are no sure thing, however the trend you note is definitely an advantage to the FHB. No rush for them though.

by DTRH | 17th May 23, 2:03pm 1684289029

Best to just wait with house price’s falling .08% per month, probably another 20% down over next 2 years when it finally hits bottom of crash it will be staying there for a long time so no rush.

by Chaosinflesh | 17th May 23, 12:43pm 1684284199

Wow.. $9 better off per week. Be quick!

by OldSkoolEconomics | 17th May 23, 1:03pm 1684285388

Yip - but food rose $3, beer $1, coffee 50c council rates $4, petrol $1, etc etc.

Would be great if all our excess pay went to the RE industry.. but sadly we have other needs.

by hootenany | 18th May 23, 8:33am 1684355621

Hell yeah! I can now by that $7 avocado I have always been dreaming of. Plus $2 extra to spend on other luxuries.

by dumbthoughts | 17th May 23, 12:46pm 1684284406

I'm not an FHB but looking at upgrading to a bigger place (owing to the expansion of the dumbthoughts clan).

The problem I see at the moment is that although prices have fallen they haven't fallen enough to offset how much higher repayments will be if we go from a house we purchased for $550k to one that was $1 million and might go for $850k in the current climate - especially if there's a strong chance the price might fall further ... just stuck in a holding pattern at the moment to see what happens.

by OldSkoolEconomics | 17th May 23, 1:33pm 1684287192

Its actually an opportunity if you are willing to hold out for a higher price for yours.... and then after a wait you become a cash buyer ready to put in low ball offers for the next house. Note at present the flippers and developers arent buying - so if you are willing to grab a do up the prices are good and tradies working cheap.

What was a $150k gap between prices you could close down to a $75k gap. In the long term its a much better move as you could save a fw years off your working life. You should be able to get a better deal on RE agent fees, conveyencing etc - as they are all a bit short of biz.

by Colin Cameron | 17th May 23, 2:38pm 1684291126

Big financial mistake most people make keep buying up so you are just working to keep the roof over your head. Why not sell your property and buy down get a smaller mortgage invest the rest and or buy another property. People buy up and just expect the home to grow in value problem is so does every other property.

by Chaosinflesh | 17th May 23, 3:25pm 1684293958

He did mention his family had grown larger, so down-sizing doesn't make much sense. (unless he were to take the gamble that house prices are going to continue to fall and he could stay a year or so in a suitable rental before buying back in).

by Colin Cameron | 17th May 23, 4:12pm 1684296771

By downsizing I mean not as exspensive not in size of building you could buy a 4 bedroom in a no collar area and pocket several hundred thousand or buy a 4 bedroom in top area and add several hundred to the mortgage which is what most do

by Speedmax | 17th May 23, 5:15pm 1684300521

Definitely sell before buying in current market.

by tomjones_04 | 17th May 23, 12:48pm 1684284519

Stupid question.... would it be more advantageous towards FHB's if the bank structured the loan differently? Instead of front loading with interest...it could be rejigged so the FHB's are initially taking down more of the principal.

by OldSkoolEconomics | 17th May 23, 1:00pm 1684285249

surely that would disadvantage the rich banks

by Chaosinflesh | 17th May 23, 2:15pm 1684289751

Table mortgages allow people to borrow more, as they reduce the current payments by increasing future payments.

The main beneficaries are those who benefit from higher house prices.. a.k.a, the banks.

If you didn't have the table mortgage, the interest portion of the payment would reduce over the years, giving you ever reducing payments. The purchase price would be lower because your initial year's payment is determined by what you can afford to repay, AND you'd pay less interest overall.

The use of table mortgages is a business decision by the banks for maximising profit - which has the intended effect of increasing house prices.

Doing the maths, as long as more than the average interest is paid back per year, it doubles the amount that gets lent - which doubles the house prices. The ROI for the bank is still the same, but since they just created the credit, and the mortgagee provided the security for the leverage, what do they care?

by peter.may | 17th May 23, 1:30pm 1684287053

That is exactly the question I have asked

by Independent_Observer | 17th May 23, 1:56pm 1684288596

Why would the bank want to do this when they work for their shareholders and their aim is to maximise profit? That interest is their profit.

by malamah | 17th May 23, 2:14pm 1684289671

FHB could choose to do this themselves. Figure out the stress test rate when they initially take out the mortgage. Make the minimum repayments, top up the difference between the minimum repayment and what they would pay under the stress test rate and put that into a savings account and offset their mortgage. There, paying less interest earlier. Any money a FHB is spending on non essentials instead of their mortgage they are loaning off their future selves in the hope of inflated future cashflows. This is the reality of mortgages.

Difficulty when hit by inflation, and interest rates higher than the initial stress test. This is a little bit like the IT bike from south park but the part where it moves forward is only an illusion.

by nguturoa | 17th May 23, 2:05pm 1684289131

How much is market up compared to Dec 2019 with respect to rising income?

Still first home buyers benefiting?

by DTRH | 17th May 23, 2:15pm 1684289759

If any FHB purchased 18 months ago the property purchased will now be worth around 20% less the way it’s going it would be crazy to risk being in same financial situation.

by Independent_Observer | 17th May 23, 2:45pm 1684291501

Yes and the additional interest payments they are going to have to make over the next 25+ years (assuming a 30 year initial term) will be considerable higher than a person who waited and can buy now with 20%+ less debt for the same property.

by malamah | 17th May 23, 3:19pm 1684293543

If the market falls 20%, that initial 20% deposit is now 25% if kept out of the housing market.

Looking at $1m home on 5% 30 year mortgage, you're looking at ~$1k pw for $800k mortgage, ~$1.5m total cost excl deposit

Looking at $800k home on 5% 17.5 year mortgage, you're looking at ~$1k pw for $600k mortgage, ~$900k total cost excl deposit

Same deposit, same weekly payment, $600k better off.

Edit: pw figures were off

by Nzdan | 17th May 23, 3:30pm 1684294213

And then you factor in pay rises/increased payments. A conveniently overlooked factor when the "I paid 22%" brigade harp on.

$800k @ 5% = $240k @ 22% = $1k per week over 30 years.
A $5k pay rise = 0.6% of the $800k mortgage, or 2% of the $240k.
Extra $100 per week on $800k goes to 25 year. On the $240k??? From 30 year to 12 years

by Nellbell | 18th May 23, 3:40pm 1684381235

Hi Nzdan, Not wanting to have any fight with young home buyers who I acknowledge are really struggling, but equally don’t want this comments section to descend into polarised rhetoric, which I sometimes feel is happens. I am part of the 22% brigade and just want to make a couple of corrections, I was earning $14,000 per year when we had the very high mortgage. Our mortgage was not for $240,000 because that would have been impossible for us to make payments on. We did have pay rises but in the order of $500 per year, never used them to pay down debt, just to keep our head above water. The housing crash that followed the 1987 Stockmarket crash caused many of our friends to lose their homes and we were forced to buy down. Pretty much the same as what is happening here…. Boom and bust cycle, just like the tulips.

I feel very sad that fiscal and monetary policy have allowed this latest huge bubble to blow out, particularly with what this has meant for younger people. I will do what I can ( at the ballot box) to ensure we allow this new phase to play out, as painful as it is for some, because I believe it’s a natural part of the economic cycle. This is the fourth housing downturn I have experienced so far… 1988/89; 2000 (Tauranga specific); 2008 GFC and now.

by Nzdan | 18th May 23, 11:56pm 1684411012

No worries, I welcome an alternate view and anecdotal experiences. All I really do is take the numbers, apply basic math and form an assumption.

Those 22% rates were only for a couple of years, and would have increased from 16% (or higher) so a ~30% increase in your borrowing costs. Going from 2.5% to 6% is a 240% increase.

You might have had $500 per year pay rises, but from 1984 to 1989 the average wage increased from $285 to $529 per week so on average people were getting $1.5-2k per year increases. But still, $500 = a 3.5% pay rise. People are getting that (or less) these days but with a mortgage 10x the size. My point was about the size of the principal amount, and how much easier it was back then to knock it back.

https://nzhistory.govt.nz/culture/the-1980s/overview#:~:text=Thanks%20t…;

by Nzdan | 19th May 23, 12:12am 1684411969

Also, of course your mortgage was not $240k. When comparing things it's easier to explain the burden in today's numbers. Otherwise you get people talking small nominal amounts of income next to double digit mortgage rates and it paints an exaggerated picture of struggle. What's ALWAYS conveniently missing from these anecdotes is what size the mortgage was.

$800k @ 5% = $1k per week. What would a mortgage need to be if interest rates were 22% and the payments were $1k? $240k.

If I had to choose I'd take the $240k mortgage @ 22% over an $800k mortgage @ 5% in a heart beat. There's a lot more upside rates movement potential on 5% vs 22%. And I'd much rather default on $240k than $800k.

by malamah | 17th May 23, 2:29pm 1684290564

Anybody know anyone under thirty with a handy $100k stashed away?

by J.C. | 17th May 23, 3:28pm 1684294091

A few. But it's all in Pepe.

by Shaft | 18th May 23, 12:01pm 1684368114

"Wasteful spending hitting FHBs and potential FHBs hard"

Where is that headline? In conjunction with...

Coke sales up 30%

Sky city's record profit

CADBURY sales grow 24%

SOSHA VAPE OPENS 10 NEW SHOPS

by CN - new | 18th May 23, 12:58pm 1684371484

Owner occupier buyers - choose your scenario and act accordingly.

For owner occupiers, a reminder of the impact of leverage (it amplifies property price changes both on the up and down):

Scenarios of impact of leverage on equity, assuming an 80% LVR for owner occupier, for a recent $1,000,000 property purchase, $200,000 initial deposit, mortgage $800,000.

A) Scenario - property price rise:

1) property price rises 5% to 1,050,000, mortgage 800,000, equity 250,000, so 25% gain in equity value from 200,000.

2) property price rises 10% to 1,100,000, mortgage 800,000, equity 300,000, so 50% gain in equity value from 200,000.

3) property price rises 15% to 1,150,000, mortgage 800,000, equity 350,000, so 75% gain in equity value from 200,000.

4) property price rises 20% to 1,200,000, mortgage 800,000, equity 400,000, so 100% gain in equity value from 200,000.

5) property price rises 25% to 1,250,000, mortgage 800,000, equity 450,000, so 125% gain in equity value from 200,000.

6) property price rises 30% to 1,300,000, mortgage 800,000, equity 500,000, so 150% gain in equity value from 200,000.

7) property price rises 35% to 1,350,000, mortgage 800,000, equity 550,000, so 175% gain in equity value from 200,000.

8) property price rises 40% to 1,400,000, mortgage 800,000, equity 600,000, so 200% gain in equity value from 200,000.

9) property price rises 50% to 1,500,000, mortgage 800,000, equity 700,000, so 250% gain in equity value from 200,000.

10) property price rises 100% to 2,000,000, mortgage 800,000, equity 1,200,000, so 500% gain in equity value from 200,000. (i.e property price doubles every 10 years)

B) Scenario - Property price falls:

1) property price falls 5% to 950,000, mortgage 800,000, equity 150,000, so 25% loss in equity value from 200,000.

2) property price falls 10% to 900,000, mortgage 800,000, equity 100,000, so 50% loss in equity value from 200,000.

3) property price falls 15% to 850,000, mortgage 800,000, equity 50,000, so 75% loss in equity value from 200,000.

4) property price falls 20% to 800,000, mortgage 800,000, equity is ZERO, so 100% loss in equity value from 200,000.

5) property price falls 25% to 750,000, mortgage 800,000, equity is NEGATIVE 50,000, so 125% loss in equity value from 200,000.

6) property price falls 30% to 700,000, mortgage 800,000, equity is NEGATIVE 100,000, so 150% loss in equity value from 200,000.

7) property price falls 35% to 650,000, mortgage 800,000, equity is NEGATIVE 150,000, so 175% loss in equity value from 200,000.

8) property price falls 40% to 600,000, mortgage 800,000, equity is NEGATIVE 200,000, so 200% loss in equity value from 200,000.

Which will the owner occupier regret most?:

1) missing out on future potential gains in equity?

2) potential actual loss of their initial deposit used as equity (which has been saved over a number of years) or even potential negative equity?

Remember, the owner occupier must be able to hold on under ALL economic environments (including any potential significant reduction in household income and mortgage interest rate rises).

by CN - new | 18th May 23, 1:11pm 1684372286

Owner occupier buyers - remember there will ALWAYS be someone telling people that now is the best time to buy.

Why?

Because these people need to earn income to put food on the table to feed their families, pay for the roof over their heads (either rent or mortgage). More property transaction volume and transaction values financially benefit the following groups of people:

1) real estate agents

2) mortgage brokers

3) property mentors

4) property developers

There are others.

Positive spin leads to increased confidence to persuade people to buy.

Always remember the vested financial self serving interests involved.