Roost Home Loan Affordability report   

For October 2013 – For immediate release

Home loan affordability worsens in first month of LVR limit
Home loan affordability worsened again across most of New Zealand in October as house prices continued rising despite the Reserve Bank imposing lending restrictions from October 1.

Surveys show a significant slowing of low deposit lending and first home buyer activity through October, but it has yet to flow through into a slowdown in house price inflation. Median house prices rose in 19 out of 24 regions and hit record highs in Auckland, Hamilton and Canterbury.

The Roost Home Loan Affordability reports show affordability worsened in 12 out of 24 regions as small income increases in some areas only partially offset the effects of higher house prices.

The Reserve Bank has said it does not expect its limit on high Loan to Value Ratio mortgages to be seen immediately in housing market data. It expects to see evidence of an impact within three to six months.

Mortgage brokers report banks are being very cautious about lending to those with deposits of less than 20% of the value of the property being bought, given many banks want to be absolutely sure they are within the Reserve Bank rules, which limit high LVR loans to 10% of all new mortgages.

"The Reserve Bank's new policy has shaken up the bank's lending and marketing strategies," said Roost Mortgage Brokers spokeswoman Colleen Dennehy.

"Banks are being choosier about who gets a loan and what their interest rates will be, which means borrowers need all the help and advice they can get from a broker," she said.

The Roost Home Loan Affordability reports show national affordability worsened to 58.2% in October from 57.3% in September after the national median house price rose to NZ$407,525 from NZ$400,000 in September. The reports measure the percentage of after tax pay needed to service an 80% mortgage on a median priced house.

The Roost Home Loan Affordability report for October showed affordability for regular home buyers improved in Manukau, Waitakere, Wanganui, Wellington City, Timaru and Invercargill, while affordability worsened in Central Auckland, North Shore, Whangarei, Tauranga, Christchurch, Nelson and Dunedin.

It was toughest for first home buyers in Auckland. It took 101.7% of a single median after tax income to afford a first quartile priced house on the North Shore in October.

Average fixed mortgage rates, which more than 50% of new borrowers now use, fell slightly in October for those with more than 20% equity and after-tax wages rose just over NZ$2 per week to NZ$816 per week. Interest rates rose for those borrowing more than 80% of the value of the home.

Housing affordability has become a major economic and political issue over the last year. The Reserve Bank and Government agreed on a toolkit of 'macro-prudential' controls in May that would see the central bank impose limits growth in high loan to value ratio mortgages. Central and local governments are also moving to address housing supply shortages.

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 in affordability in most cities.

It took 47.7% of a single first home buyer's income to afford a first quartile priced house nationally, up from from 46.9% a month earlier. The most affordable city in New Zealand for first home buyers was Wanganui, where it took 20.6% of a young person's disposable income to afford a first quartile home. The least affordable was the North Shore of Auckland at 101.7%.

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 38.3% of their after tax pay in October to service the mortgage on a median priced house. This is up from 37.6% in September.

On this basis, most smaller 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 are assumed to have no children), affordability nationally worsened to 23.6% of after tax income in households with two incomes required to service the debt, up from 23.1% 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.

Roost Home loan affordability for typical buyers

General/New Zealand Report: http://www.interest.co.nz/property/home-loan-afford

Roost Home loan affordability for first-home buyers

General/New Zealand Report:
http://www.interest.co.nz/first-home-buyer

Links to individual reports for regions can be found here

Click for big version.

Question and Answers about the report

How does interest.co.nz work out these numbers?
Interest.co.nz gathers data from Statistics New Zealand and IRD on wages in each region, data from the Real Estate Institute from each region each month, and data from banks and non-banks on interest rates. It has calculated home loan affordability going back to the beginning of 2002.

How is this survey different from the Massey University survey of affordability?
The Massey study is only done quarterly rather than monthly and uses an index of Home affordability rather than actually measuring home loan affordability. It uses an index rather than the actual measure of the proportion of after tax pay needed to service an 80% mortgage on a median home. The exact composition and meaning of the index is not detailed.

Why use a single median income rather than household income?
It’s true that most homebuyers are using a combination of one or more full or part time incomes to service their mortgage. Each household is different and may be using incomes from different sources. The best measure of average national household income is calculated officially once in every three years by Statistics New Zealand. Interest.co.nz chose to use the median income data series from IRD and Statistics NZ because it can be measured monthly and can be drilled down by region and by age. We do include a chart showing how many median incomes are required to keep mortgage payments at 40% of take home pay. It is currently around 2 median incomes.

Why is home loan affordability important?
It is a useful way to work out if a housing market is overvalued. It’s clear house prices stopped rising when the national affordability ratio rose above 80% or 2 median incomes to service the average home loan. It’s a way of comparing affordability of housing markets with a national average and comparing housing values from one year to the next. For example, the affordability ratio in 2002 before the housing boom really took off was around 41%.

About Roost
Roost is the sponsor of this Report, and the Reports must be referred to as the Roost home loan affordability reports. Roost, owned by AMP, is one of New Zealand’s largest independent home loan and investment property mortgage brokers with 16 franchisees nationwide. Roost offers to source the perfect loan for its customers from a panel of lenders and insurance advice from Roost insurance specialists. Roost was established in 1996. For more information please visit www.roost.co.nz

ENDS

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