Home loan affordability improves

Home Loan Affordability report from interest.co.nz

December 2008

Home loan affordability improves to best level in 4 years

Plunging mortgage rates and another fall in house prices improved home loan affordability by a record amount in December to its best level in 4 years, the monthly Home Loan Affordability report from financial information website www.interest.co.nz shows. At current rates of improvement, housing is likely to be broadly affordable again for most home buyers towards the end of 2009.

Affordability recovered dramatically through 2008 as both the slumping housing market and an unprecedented fall in fixed mortgage rates made it easier for both first home buyers and established households to buy houses. A reduction in tax rates also helped lift disposable incomes.

The improvement in December was driven largely by lower interest rates in the wake of the Reserve Bank’s 150 basis point cut in the Official Cash Rate to 5% on December 4. A 3% fall in the median house price to NZ$328,500 added to the improvement created by a 41 basis point fall in the average 2 year fixed mortgage rate to 7.07%.

The proportion of an after-tax median income needed to service the mortgage for the median house price fell to 59.6% in December from 63.8% in November. This was the first improvement to below 60% for a typical home buyer since January 2005 and well below the record worst level of 82.9% in November 2007.

Through 2008 the median house price fell 7% and the 2 year fixed mortgage rate fell 227 basis points, driving the Affordability proportion down from 81.1% in December 2007 to 59.6% in December 2008.

However, affordability remains out of reach for most home buyers. The threshold proportion of after tax income considered prudent to sustainably own a house is around 40%. Anything above that is starting to become unaffordable.

The Home Loan Affordability report’s measure of affordability for a typical first home buyer (a median income earner aged 25-29 buying a first quartile home) shows the mortgage servicing proportion improving to 52.2% in December from 54.4% in November and 73.0% a year earlier.

The report’s measure of affordability for a ‘typical’ household (one 30-34 year old male earning a median income, one 30-34 year old female earning 50% of a medium income and one child over five) shows that proportion dropping below 40% for the first time since January 2005. This proportion dropped to 38.9% in December from 41.6% in November and 52.8% a year ago.

“Affordability looks set to improve further through the remainder of 2009 as interest rates and house prices continue to fall at the same time as tax rates are cut,” Interest.co.nz Editor Bernard Hickey. “At the current rate of improvement housing would be broadly affordable for many home buyers by mid to late 2009,” Hickey said.

“However, one new hurdle for home buyers is that mortgages with low interest rates will not be as freely available as they were through 2003 and 2004 when affordability was back below the 40% threshold,” he said. “Rationing of credit by banks and demands for higher deposits may constrain a rebound any housing market volumes and prices, keeping affordable housing out of the reach of buyers with only small deposits.”

The Reserve Bank of New Zealand is widely expected to cut the Official Cash Rate by a further 100 basis points to 4% next Thursday. Many economists expect further cuts through the first half of 2009 to a low of 3% to 3.5%. That creates the potential for variable mortgage rates to fall to 5.5% to 6%.

All 12 regions surveyed in the Home Loan Affordability report showed improvements in affordability. The biggest improvements in affordability were in Nelson/Marlborough and the Central Otago/Queenstown Lakes regions, where median house prices fell 11% and 10% respectively.

Southland continued to be the cheapest region in the nation with the typical home buyer having to pay 33% of take-home pay to afford the mortgage on a median house, down from 34.2% in November and 49.3% a year ago. However, Southland still remains the only region where its affordability levels is under the 40% threshold considered affordable.

Note to editors: The Housing affordability series from interest.co.nz was first published in February 2007 year and was sponsored by Fairfax Media up until May 2008. It was sponsored by Wizard Home Loans until December. Wizard Home Loans is now being wound up by its owner GE Money.

Home loan affordability for typical buyers

General/New Zealand Report:
http://www.interest.co.nz/HLA/HLA-NZ-January2009.asp

Links to individual reports for regions can be found here

Home loan affordability for first-home buyers

General/New Zealand Report:
http://www.interest.co.nz/HLA/FHB-NZ-January2009.asp

Links to individual reports for regions can be found here

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%.

ENDS

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