Home Loan Affordability report from interest.co.nz

Home Loan Affordability report from interest.co.nz     
 

for IMMEDIATE release

Record improvement in housing affordability in January 
Housing seen affordable again by the end of 2009

Housing affordability improved a record amount to its best levels in 5 years in January because of further falls in house prices and a sharp reduction in mortgage interest costs, a monthly survey by interest.co.nz has found.

After years of housing being unaffordable for most New Zealanders, interest.co.nz is now forecasting that housing will be affordable again for most New Zealanders by the end of 2009 if the current trend of improvement continues. 

“All of the trends are converging to make housing much more affordable for both families and single income home buyers. House prices are sliding, interest rates have fallen fast, taxes are set to be cut again and incomes are rising, even if much more slowly. These have all combined to reduce the proportion of after tax income needed to service the mortgage on a median home,” said interest.co.nz editor Bernard Hickey.

“The one big silver lining of the credit crunch is this rapid improvement in housing affordability,” Hickey said.

The standard measure of affordability nationally showed the proportion of a median after tax pay needed to service an 80% mortgage on a median house fell to 54.1% in January from 59.8% in December, which was a record improvement for any one month since the survey data started in January 2002. This is sharply better than the 82.9% record worst level recorded in November 2007 when house prices peaked.
This was the best level since April 2004.   Interest.co.nz sees this measure being affordable for most when it dips below 40%.

The first-home-buyer measure improved to 46.8% from 52.4% last month and is well below the November 2007 peak of 73.8%. It is at the best levels since November 2004. This measure uses the median income for a 25-29 year old buying the first quartile home. Interest.co.nz sees this as affordable when it dips below 40%.

Our measure of the standard household (one male aged 30-34 years earning the median income, one half time female 30-34 year old and one 5 year old child, with the family receiving working-for-families benefits) shows their proportion was at 35.3% in January, down from 39% in December and a November 2007 peak of 53.9%. Interest.co.nz sees this as affordable when it reaches 30%. 

Our measure of the first-home-buyer household (one full time male aged 25-29 and one full time female aged 25-29 with no kids) buying the first quartile home shows an improvement to 22.0% from 24.7%. We think that this is now affordable, being below the 30% threshold.

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%. 

Bernard Hickey
Managing Editor  - Interest.co.nz

ENDS

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