Auckland home loan affordability worst in 3 years; first home buyer household still finding affordable options in most regions

A surge in house prices in Auckland worsened New Zealand-wide home loan affordability in March to its most expensive level in three years, the Roost Home Loan Affordability report shows.

Affordability was hardest hit in the Auckland region where the median house price has jumped 16% in a year to a record high.  The report shows it now takes 87% of a single median after tax income to afford a median priced house in central Auckland, up from 67.3% as recently as January this year. 

Central Auckland affordability is now at its worst level since March 2010, although it remains below its worst ever levels of 107.3% of income required in November 2007 when interest rates were over 10%. They are now closer to 5%.

Interest rates were broadly flat in March and after-tax wages rose just over NZ$1 per week, but this was overwhelmed by the 4.7% or NZ$18,000 jump in the national median house price to a record high NZ$400,000.

The issue of housing affordability is becoming a more prominent political issue as tensions grow between the National coalition government and the Auckland Council over land and housing supply shortages.

It is also becoming a broader economic issue after the Reserve Bank warned this month in its strongest terms yet that it may have to hike the Official Cash Rate and limit riskier mortgage lending to prevent a bubble developing in Auckland property prices that could  burst and damage the banking system.

Nationally, affordability worsened by 2.5 percentage points in March from February, which meant it took 57.4% of a single median income after tax to afford an 80% mortgage on a median house , according to the Roost home loan affordability report released today.

“The weather may be cooling down, but the housing market remains hot, particularly in Auckland where buyers are fighting for a limited supply of listings and financing is easier to find than in previous years," said Colleen Dennehy, a spokeswoman for Roost Mortgage Brokers, which sponsors the Home Loan Affordability report series from Interest.co.nz.

"First home buyers and rental property investors are continuing to take advantage of these record low mortgage rates and intense competition between banks to borrow to get into a rising market," Dennehy said.

Affordability worsened in all major areas except Northland, Wellington and Waikato, where lower house prices made home loans more affordable.

Affordability worsened the most in Auckland, central OtagoLakes and Southland, where house prices rose the most.

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 also a deterioration, particularly in Auckland, Taranaki, Otago and Southland. It now takes 97.3% of a first home buyer's income to afford a first quartile priced house on the NorthShore in Auckland.  The most affordable city in New Zealand for first home buyers is Wanganui, where it takes 15.7% of a young person's disposable income to afford a first quartile home.

However, apart from Auckland, Queenstown and Christchurch, it takes around 20-40% of after tax pay to afford an 80% mortgage on a lower quartile priced house. That percentage rises however to 71%, 79.5% and 59% respectively in those three most expensive areas.

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 37.8% of their after tax pay in March to service the mortgage on a median priced house. This is up from 36.2% the previous month.

On this basis, most 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 households in the 25-29 age group (which is assumed to have no children), affordability also worsened, with 23.7% of after tax income in households with two incomes required to service the debt, up from 22.3% the previous month.

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.

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Full regional reports are available below: