Lower house prices and static mortgage rates improved housing affordability substantially in many parts of the country in April

By Greg Ninness

Housing became more affordable for first home buyers in most parts of the country in April, as lower quartile dwelling prices dropped while mortgage interest rates remained unchanged, making homes more affordable, according to interest.co.nz’s latest Home Loan Affordability Report.

The report said that Real Estate Institute of NZ sales data for April shows lower quartile selling prices declined in seven regions in April compared to March and rose in five.

The REINZ’s lower quartile prices for April declined in Northland, Auckland, Hawke's Bay, Taranaki, Nelson/Marlborough, Canterbury/Westland and Southland compared to March, and rose in Waikato/Bay of Plenty, Manawatu/Wanganui, Wellington, Central Otago/Lakes and Otago.

In most of the regions where prices fell in April, they had dropped back from record highs achieved in March, while in all five regions where prices rose they set new record highs.

The biggest falls occurred in Auckland where the lower quartile price in the Central Auckland suburbs fell from $772,400 in March to $721,500 in April.

On the North Shore it dropped from $821,700 to $767,900, and in South Auckland it fell from $694,500 to $675,300. In West Auckland it dropped from $680,300 to $657,800.

Across the entire Auckland region the lower quartile selling price was $700,800, which means it has now fallen back to below where it was at the start of the summer selling season in October last year when it was $710,400.

On Auckland’s North Shore the lower quartile price is now the lowest it has been since April last year, and in West Auckland it is the lowest it has been since March last year.

And although the lower quartile price rose to a new record in Waikato/Bay of Plenty, in Tauranga it was $460,000 in April, down by $10,000 compared to March, and below the record high of $485,000 achieved in November last year.

In Hamilton it hit a new record high of $429,750, up $2750 compared to March.

The biggest increase in the lower quartile price occurred in the Wellington Region, where it jumped from $425,600 in March to $449,300 in April.

In Canterbury the lower quartile price dropped from $372,500 in March to $367,100 in April, which means it has fallen for two months in a row from its peak of $389,200 set in February.

In Central Otago/Lakes District the lower quartile price rose from $543,900 in March to hit a new high of $551,900 in April, making it’s the second most expensive region in the country after Auckland.

Interest rates flat

However although the movement in lower prices was substantial in some places during April, interest rates remained flat.

The average of the two year fixed mortgage rate offered by the major banks has been stuck on 4.84% since February, although that’s significantly up from its record low of 4.35% in May last year.

Static interest rates meant home loan affordability improved in the seven regions where prices fell and worsened in the five regions where they increased.

The Home Loan Affordability Report also tracks the median after tax income for working couples aged 25-29 in each region, estimating how much money they would have to put towards a deposit if they saved 20% of their net income for up to four years, what the mortgage payments would be on a lower quartile-priced home, and how much of their weekly income the mortgage payments would eat up.

Housing is considered unaffordable when the mortgage payments consume more than 40% of take home pay.

Auckland remains the most unaffordable place in the country by far, because typical first home buyers would not just struggle to meet the mortgage payments on a home purchased at the region’s lower quartile price of $700,800, they would also find it extremely difficult to get enough money together for a deposit.

The median after tax pay for couples aged 25-29 who both work full time in Auckland is $1574.60 a week.

Need to borrow $627,771

The Home Loan Affordability report for Auckland calculates that if they saved 20% of their net pay over four years and put the money on term deposit, they would have $73,029 to put towards a deposit on a home.

That’s just 10.4% of the lower quartile price of $700,800 in Auckland, which would make it difficult for typical first home buyers on average wages to get mortgage finance and could see them having to defer buying a home for several years.

If they were able to get a mortgage with a deposit of $73,029, they would need to borrow $627,771.

That’s a massive amount of debt for a young couple on average incomes to take on, and they would need to set aside $762.75 a week for mortgage payments, which would be 48.4% of the median take home pay of working couples aged 25-29.

Although that’s down from the record 51.2% recorded in March, it’s still well into unaffordable territory, and the figure does not include other property-related expenses such as rates, insurance and maintenance.

Housing has only become unaffordable for first home buyers in Auckland since October 2014, when mortgage payments nudged past the 40% of median net pay threshold.

Between October 2014 and April 2017, Auckland’s lower quartile dwelling price has risen from $515,600 (which was the first time it passed $500,000), to $700,800, an increase of 36% in two-and-a- half years.

That has been driven by strong, migration-fuelled population growth that has seen demand for housing outstrip the available supply, creating a housing shortage which is still increasing, and the resulting rise in prices has then been turbocharged by record low interest rates.

36% versus 3.6%

But over the same period the median take home pay for couples working full time in Auckland has gone from $1520.09 a week to $1574.60 a week, an increase of just 3.6%.

Essentially the much more rapid rise in house prices compared to the much lower increase in wages has meant buying a home in has become unaffordable for working couples in Auckland on low to medium incomes.

All of Central Otago now unaffordable for first home buyers

And they have now been joined by typical first home buyers in the Central Otago/Lakes region.

While lower quartile house prices in Queenstown have been out of reach for typical first home buyers for several years, in April the lower quartile price for the entire Central Otago/Lakes region, hit a new record $551,900, which pushed the mortgage payments for a lower quartile-priced home passed the 40% affordability threshold to take up 40.1% of the median net take home pay of working couples aged 25-29 in the region.

That means the entire Central Otago/Lakes region is now considered unaffordable for typical first home buyers.

However Auckland and Central Otago/Lakes are still the only regions in the country where housing is unaffordable for first home buyers.

In all other regions the mortgage payments on a lower quartile-priced home would take up less than a third of the take home pay of typical first home buyers, and in many regions it would be less than a quarter.

Here’s how much of their take home pay a couple where both are aged 25-29 and earning the median wage for full time work in their region, would need to set aside each week to cover the mortgage payments ion a lower quartile-priced home in their region:

Northland 23.7%, Auckland 48.4%, Waikato/Bay of Plenty 25.0%, Hawke's Bay 19.0%, Manawatu/Wanganui 14.2%, Taranaki 18.4%, Wellington 28.3%, Nelson/Marlborough 24.9%, Canterbury 22.7%, Central Otago/Lakes 40.1%, Otago 17.2%, Southland 10.2%, All of New Zealand 22.0%.

Note: The reports for individual towns/cities within regions are not available this month because of changes being made to the way the information about them is presented and the technical work that is required to update our database. We hope the reports for individual towns and cities will be available again from the May figures (released in June) onwards.