BNZ Home Loan Affordability report

BNZ Home Loan Affordability report
For July 2009
for release 2:30pm August 21, 2009

Home loan affordability unchanged before spring selling season

The BNZ Home Loan Affordability measure was unchanged in July from June as interest rates were steady and house prices did not move. However, interest rate increases since the end of July and signs of renewed confidence in the housing market going into the spring open home season will keep the pressure on home loan affordability.

The steady median house price and fixed mortgage rates helped leave the proportion of after-tax pay needed to service a mortgage on a median home at 56.5% in July. However, this is sharply better than the 77.1% seen a year ago and much improved from 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.

However, average fixed mortgage rates, which most home buyers use, have edged up in early August and there are signs of sales activity returning to the market as the weather improves, suggesting prices have at least stopped falling or may even rise slightly.

Stephen Mockett, Chief Operating Office, at BNZ says: “Affordability has improved markedly since last spring when housing market activity was in the doldrums and mortgage interest rates were still over 9%.”

“However, fixed mortgage rates have risen slightly and any prospect of higher house prices could decrease some of that improvement in affordability heading to the summer,” continues Mockett.

The REINZ median house price was steady at NZ$340,000 in July, while the average 2 year mortgage rate was unchanged at 6.25% by the end of July. The average 2 year rate has since risen to around 6.5%, although some banks, including BNZ, have cut their floating rates slightly to around 5.8%.

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 and higher local term deposit rates.

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.

However, affordability worsened for a typical first home buyer. The BNZ Housing Affordability report’s measure shows the mortgage servicing proportion worsened to 49.6% in July from 48.7% in June, largely due to a 1.7% increase in the first quartile house price to NZ$247,100. 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.

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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