Home loan affordability worsens as prices bounce

BNZ Home Loan Affordability report
For June 2009
for release midday July 20

Home loan affordability worsens as house prices bounce

The BNZ Home Loan Affordability measure worsened in June from May, thanks to a slight rise in average fixed mortgage rates and an increase in the median house price.

The rise in both house prices and interest rates helped increase the proportion of after-tax pay needed to service a mortgage on a median home to 56.3% in June from 55.9%. However, this is sharply better than the 78.1% seen a year ago and the record worst level of 83.4% in March last year, said Interest.co.nz, which produces the series of national and regional reports for BNZ.

Affordability improved in an unbroken run through 2008 as interest rates fell sharply and house prices fell. A rise in after-tax incomes because of wage inflation and a tax cut helped extend the trend. But that run of improvement ended in February, March and April this year as house prices stopped falling and interest rates began to bottom out.

“The rebound in the housing market through the autumn and winter will please homeowners, but first home buyers are now finding it slightly more difficult to get into the housing market,” said Interest.co.nz editor Bernard Hickey

“Housing affordability is unlikely to improve much further without further significant falls in house prices, given wage growth is likely to be subdued in the next couple of years without further tax cuts and as unemployment rises,” Hickey said.

The indefinite delay of tax cuts planned for 2010 and 2011 puts all the weight on interest rates and house prices as sources for further improvement.

The REINZ median house price rose to NZ$340,000 in June from NZ$337,500 in May, while the average 2 year mortgage rate rose to 6.25% from 6.23%.

Affordability hit its worst level of 83.4% in March 2008 just after house prices peaked and 2 year mortgage rates were close to 10%.

Many home buyers jumped in March , April and May to take advantage of lower interest rates and look for bargains, which improved the number of houses sold and stabilised prices. But short term mortgage interest rates flattened out in late March and longer term mortgage rates began to rise in line with rises on wholesale markets.

Affordability remains slightly out of reach for most individual 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.

Affordability also worsened for a typical first home buyer. The Housing Affordability report’s measure shows the mortgage servicing proportion worsened to 44.3 in June from 44.1% in May. This measure is for a median income earner aged 25-29 buying a first quartile home. Interest.co.nz thinks the ‘affordable’ threshold is 40% for such a home buyer.

Home loan affordability for typical buyers

General/New Zealand Report:
http://www.interest.co.nz/HLA/HLA-NZ-July2009.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-July2009.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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