First home buyers are being squeezed between rising prices and rising interest rates in the upper North Island, but prices are easing in other parts of the country

By Greg Ninness

The housing market is at an interesting junction for first home buyers, with lower quartile dwelling prices hitting record highs in the upper North Island but falling in most other parts of the country and interest rates also starting to creep up, according to interest.co.nz's Home Loan Affordability Reports.

This is putting housing further out of reach for growing numbers of first home buyers in Auckland while making it more affordable in much of the rest of the country.

The reports track the monthly movements in the REINZ's lower quartile selling prices throughout the country and changes in the median after tax income for typical first home buyers (full time working couples aged 25-29 in the same regions), to work out how much of their weekly pay would be taken up by mortgage payments if they purchased a home at the lower quartile selling price (the price point at which 25% of sales would be below and 75% above) to monitor changes in affordability over time.

In October the REINZ's lower quartile selling price hit record highs in four regions with particularly big increases in Auckland, where it jumped from $682,100 in September to $710,400 in October, an increase of $28,300 (4.1%) in a month.

The lower quartile price also surged in Southland, although from a much lower base, rising from $153,700 in September to $170,000 in October, an increase of $17,200 (+11.2%) for the month.

October was the first time that the lower quartile price has pushed past $700,000 in Auckland and past $170,000 in Southland.

The increases in Northland and Waikato/BoP were much more modest, with the lower quartile price increasing by just over $1000 in Northland and by a minuscule $200 in Waikato/Bay of Plenty, suggesting prices in those areas could be flattening out.

The lower quartile price also increased slightly in Manawatu/ Wanganui, rising from $198,800 in September to $201,400 in October, but that remains below the area's record high of $206,600 set in July.

However around the rest of the country the lower quartile price fell in October compared to September and in some places the decline was substantial.

The biggest drop in the lower quartile selling price occurred in the Central Otago/Lakes district, where it dropped from back from its record high of $535,200 in September to $491,700 in October, a decline of $43,500 (8.1%) for the month.

That was followed by Taranaki, where the lower quartile price price dropped from its record $268,000 in September to $233,000 in October, down $34,800 (-13%) for the month, and Wellington where the lower quartile dropped form its record high of $392,500 in September to $381,700 in October, down $10,800 (-11.7%).

In Canterbury the lower quartile price dropped by $7700 from $368,900 in September to $361,200 in October.

There were smaller falls in Hawkes Bay, Nelson/Marlborough, and Otago.

While a fall in the lower quarter selling price from one month to the next is too short a time frame to indicate a trend, the fact that the lower quartile selling prices peaked in September and then dropped back in October in Hawkes Bay, Taranaki, Wellington, Nelson/Marlborough, Canterbury and Otago, may indicate that prices in those markets have peaked.

The other significant trend that is apparent in the latest Home Loan Affordability Reports is that mortgage interest rates have begun to rise.

Much of the discussion around rising interest rates has suggested it is something that has only occurred in the last month or so, however according to the Home Loan Affordability Reports, the average of the two years fixed mortgage rates charged by the main banks (the figure used in the reports' affordability calculations) bottomed out at 4.35% in May and has since risen to 4.49%, while the average floating rate has been unchanged on 5.59% for the last three months.

However, ASB recently raised its floating rate, so we are likely to see the average floating rate starting to follow fixed rates up sometime soon.

So far, the rises in mortgage rates we have seen have been small and their impact on home buyers would have been marginal.

However, the rate at which mortgage interest rates rise could start to pick up from next year onwards and that may be weighing on the minds of some potential buyers when they consider how much they would be prepared to pay for a property.

So where does all this leave first home buyers?

If they live in Auckland the prospect of owning their own home would have receded further over the horizon for many of them.

They typical first home buyers profiled in the Home Loan Affordability Reports are couples who both work full time and earn the median wage in each region.

In Auckland that would see the typical first home buyers taking home $1588.26 a week (after tax) between them.

If they had managed to save 20% of their take home pay for four years and held it in an interest bearing bank account, they would have $72,751 to use as a deposit on a home.

So to buy a home at Auckland's lower quartile selling price of $710,400 in October, they would need a mortgage of $637,649.

Because their deposit would be less than the standard 20% of the purchase price, they would not be eligible for any of the "special" mortgage interest rates offered by the banks and would have to pay the full rate.

That means they would need to set aside $744.46 a week just to cover the payments on a 30-year mortgage, which would be 46.9% of their take home pay, and that's before allowing for other property related expenses such as rates, insurance and maintenance.

To say their budget would be tight would be a considerable understatement and they could be seriously exposed to financial hardship if interest rates start to increase substantially next year.

But the reality for growing numbers of first home buyers is that are unlikely to be able to borrow the amount of money they would need to buy even a modest home in Auckland and their goal of home ownership continues to slip further out of reach.

Around the rest of the country things are very different.

Even in areas such as Waikato/Bay of Plenty where the lower quartile price continues to increase, relative to Auckland those prices are still cheap while incomes are not much lower than in Auckland.

So mortgage payments on a lower quartile priced home remain well below the 40% affordability threshold in all regions except Auckland.

The second most expensive region in the country for first homes buyers is Central Otago/Lakes where the lower quartile price was $491,700 in October, which would mean typical first home buyers would have to set aside just a third of their take home pay to service the mortgage.

In Waikato/Bay of Plenty the mortgage payments on a lower quartile-priced home would take up just 21.6% of typical first home buyers take home pay, In Wellington it would be 22.2%, in Canterbury it would be 21.2%, in Otago it would be 14.8% and in the cheapest region in the country, Southland,  only 10.6% of a typical first home buyers' take home pay would need to be put towards the mortgage payments on a lower quartile priced home.