Home loan affordability better in all but 3 areas in March

Roost Home Loan Affordability report   

Home loan affordability better in all but 3 areas in March

Lower interest rates and flat to lower house prices helped improve home loan affordability in 21 out of 24 of areas surveyed across New Zealand in March, the Roost Home Loan Affordability report shows.

A loosening of lending criteria and more intense competition for mortgage lending by the banks is also making it easier for first home buyers to get into the market, the report found.

Only Auckland Central, Tauranga and Kapiti Coast saw their home loan affordability measures deteriorate as house prices rose significantly in those areas, overwhelming the positive effects of the March 10 floating mortgage rate cuts after the Reserve Bank’s monetary policy loosening.

There were renewed signs of a two speed housing market across New Zealand in March. Higher priced properties in Auckland and some wealthier resort areas saw increased activity and prices, while provincial cities, Christchurch and the fringe areas of large cities experienced flat to falling prices.

First home buyer affordability continued to improve to its best levels in seven years as flat to lower prices for entry level homes and the mid-March mortgage rate cuts combined to reduce mortgage servicing costs as a percentage of after-tax income.

There are also fresh signs that some banks have relaxed lending criteria and are offering discounts on legal and loan establishment fees.

“The banks are competing harder than ever for business, which is improving the prospects for first home buyers in particular,” said Rhonda Maxwell, spokeswoman for mortgage broking group Roost Home Loans.

Some banks are offering loan to value ratios of up to 90 and 95% and giving interest rate discounts when in competitive situations, Maxwell said.

“The increased willingness of some banks to go the extra mile with fee discounts and interest rate reductions is encouraging some new home buying,” Maxwell said.

A young couple earning the median wage could afford to buy a first quartile priced house in March, with 21.1% of their disposable income required to service an 80% mortgage. This is down from 21.6% in February and down from a June 2007 high of 35.1%.

The national median house price rose to a record high NZ$365,000 in March from NZ$350,000 in February, but the first quartile house price was flatter at NZ$250,000 in March from NZ$245,000 in February. Prices outside of central Auckland, Tauranga and Kapiti Coast are flat to falling.

The Roost Home Loan Affordability report measures affordability nationally and regionally for individual income earners and households, taking into account median house prices, interest rates and incomes.

The Roost Home Loan Affordability measure for all of New Zealand showed the proportion of a single median after tax income needed to service an 80% mortgage on a median was 53.7% in March. This was better than the 54% seen at the end of February and the 83.4% seen at the peak of the boom in March 2008.

Affordability improved across 21 of the 21 areas surveyed. Central Auckland, Tauranga and Kapiti Coast affordability worsened because of house prices rises. Affordability improved dramatically in South Auckland, Whangarei, Rotorua, Gisborne, Napier, New Plymouth, Queenstown and Invercargill because of house prices being flat to falling while interest rates fell.

Affordability has been improving since December 2009 as house prices have flattened out and interest rates have fallen, the monthly measure calculated by interest.co.nz in association with Roost found.

Most home owners are still on fixed mortgages, but more new borrowers are choosing to float, given floating rates at around 5.75% are cheaper than average longer term fixed rates at around 6.2%. Some borrowers are choosing to fix for shorter periods (6 months) where some rates are below 5.6%.The Home Loan Affordability reports are now using the floating rate as most new mortgages are now floating rather than fixed. Home loan 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%.

Affordability is difficult in Auckland, Wellington, Christchurch, Hamilton and Tauranga for those on a single median income, but homebuyers in smaller provincial cities will find home ownership much more affordable. Households with two incomes are also in a stronger position, particularly those bidding for homes priced in the lower quartile.

Affordability for households with more than one income improved slightly because of the fall in interest rates. This measure of a ‘standard typical household' found the proportion of after tax income needed to service the mortgage on a median house was to 35.3% at the end of March from 35.5% in December.

This measure assumes one median male income, half a median female income aged 30-35 and a 5 year old child that receives Working-for-Families benefits. Any level over 40% is considered unaffordable for a household, whereas any level closer to 30% has coincided with increased buyer demand in the past.

The survey’s measure of a ‘standard first-home-buyer household' found the proportion of after tax income needed to service the mortgage on a first quartile home fell to 21.1% in March from 21.6% in February.

This measure assumes a first home buyer household includes a median male income and a median female income aged 25-29 with no children. 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.
 
 
 
 

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

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