Home loan affordability improves as median house price slips

Roost Home Loan Affordability report

For December 2011 – For immediate release

Home loan affordability improves as median house price slips; 1st home buyers keen

Home loan affordability improved in December after median house prices dipped nationwide, helping to lift demand from first home buyers who see record low interest rates staying lower for longer and who can now use their KiwiSaver money as a deposit.

Affordability for young couples who both have jobs is near its best levels in seven years because of record low interest rates and rising incomes, although affordability for home buyers in central Auckland, Wellington and Christchurch remains difficult.

“There has been a surge of interest from first home buyers in recent months because of the low interest rate outlook and because many are now able to start withdrawing their KiwiSaver money,” said Rhonda Maxwell, spokeswoman for Roost Mortgage Brokers, which sponsors the Roost Home Loan Affordability report from Interest.co.nz.

After three years in the scheme KiwiSavers who want to buy a first home can withdraw contributions made by themselves and their employers for a deposit. They cannot withdraw the government’s kick-start or tax credits contributed by the government.

Many first home buyers reached their 3 year anniversary in late 2011 and banks are competing hard for these home buyers, often lending up to 95% of the value of the home and waiving loan fees to win business from rivals.

“Mortgage brokers and advisers are in the best position to get the best deal from any banks and either to advise borrowers directly on using their KiwiSaver contributions, or refer them to an authorized fianancial adviser,” said Maxwell.

Comments from the Reserve Bank over the last month and the darkening outlook for the global economy have further flattened the interest rate outlook. Most economists now see the Official Cash Rate on hold here until late this year or early next year.

Some banks even trimmed their fixed mortgage rates in early January as wholesale interest rates fell, making the fixed vs floating decision even tougher for borrowers.

Affordability improved nationally, with prices lower in central and South Auckland, and in central Christchurch. The median house price fell to NZ$355,000, which reduced the proportion of after tax income needed to service an 80% mortgage on a median house to 52.0% in December from 53.8% in November, the Roost Home Loan Affordability report shows.

Household affordability for first home buyers improved to 21.5% of income from 22.1% the previous month and is around its best levels since late 2004. First home buyer household affordability is measured by calculating the proportion of after tax pay from two young median income earners required to service an 80% home loan on a first quartile priced house.

Affordability worsened somewhat in North Shore, West Auckland, Hamilton and Tauranga, where prices rose. See the main report for links to regional reports.

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 in their regions and cities.

Affordability has generally been improving since December 2009 as house prices have flattened out and interest rates have fallen, although there has been some deterioration in recent months as house prices have firmed again.

More than 60% of home owners are now on floating mortgages and most new borrowers are choosing to float, given advertised floating rates at around 5.75% are cheaper than average longer term fixed rates at around 5.8%. The Home Loan Affordability reports use the floating rate.

Affordability for households with more than one income improved in December because of the fall in median house prices. This measure of a ‘standard typical household' found the proportion of after tax income needed to service the mortgage on a median house fell to 34.0% from 35.2% in November.

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 first home buyer household 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.
Roost Home loan affordability for typical buyers

General/New Zealand Report: http://www.interest.co.nz/property/home-loan-affordability

Links to individual reports for regions can be found here

Roost Home loan affordability for first-home buyers

General/New Zealand Report:

http://www.interest.co.nz/first-home-buyer

Links to individual reports for regions can be found here

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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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