Auckland Home Loan Affordability Worst In 3 Years

Roost Home Loan Affordability Report

For March 2012 – For immediate release

Auckland Home Loan Affordability Worst In 3 Years

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A surge in house prices in Auckland worsened New Zealand-wide home loan affordability in March to its most expensive level in three years, the Roost Home Loan Affordability report shows.

Affordability was hardest hit in the Auckland region where the median house price has jumped 16% in a year to a record high. The report shows it now takes 87% of a single median after tax income to afford a median priced house in central Auckland, up from 67.3% as recently as January this year.

Central Auckland affordability is now at its worst level since March 2010, although it remains below its worst ever levels of 107.3% of income required in November 2007 when interest rates were over 10%. They are now closer to 5%.

Interest rates were broadly flat in March and after-tax wages rose just over NZ$1 per week, but this was overwhelmed by the 4.7% or NZ$18,000 jump in the national median house price to a record high NZ$400,000.

The issue of housing affordability is becoming a more prominent political issue as tensions grow between the National coalition government and the Auckland Council over land and housing supply shortages.

It is also becoming a broader economic issue after the Reserve Bank warned this month in its strongest terms yet that it may have to hike the Official Cash Rate and limit riskier mortgage lending to prevent a bubble developing in Auckland property prices that could burst and damage the banking system.

Nationally, affordability worsened by 2.5 percentage points in March from February, which meant it took 57.4% of a single median income after tax to afford an 80% mortgage on a median house , according to the Roost home loan affordability report released today.

“The weather may be cooling down, but the housing market remains hot, particularly in Auckland where buyers are fighting for a limited supply of listings and financing is easier to find than in previous years," said Colleen Dennehy, a spokeswoman for Roost Mortgage Brokers, which sponsors the Home Loan Affordability report series from Interest.co.nz.

"First home buyers and rental property investors are continuing to take advantage of these record low mortgage rates and intense competition between banks to borrow to get into a rising market," Dennehy said.

Affordability worsened in all major areas except Northland, Wellington and Waikato, where lower house prices made home loans more affordable.

Affordability worsened the most in Auckland, central Otago Lakes and Southland, where house prices rose the most.

For first home buyers – which in this Roost index are defined as a 25-29 year old who buys a first quartile home – there was also a deterioration, particularly in Auckland, Taranaki, Otago and Southland. It now takes 97.3% of a first home buyer's income to afford a first quartile priced house on the North Shore in Auckland. The most affordable city in New Zealand for first home buyers is Wanganui, where it takes 15.7% of a young person's disposable income to afford a first quartile home.

However, apart from Auckland, Queenstown and Christchurch, it takes around 20-40% of after tax pay to afford an 80% mortgage on a lower quartile priced house. That percentage rises however to 71%, 79.5% and 59% respectively in those three most expensive areas.

Any level over 40% is considered unaffordable, whereas any level closer to 30% has coincided with increased buyer demand in the past.

For working households, the situation is similar although bringing two incomes to the job of paying for a mortgage makes life considerably easier. A household with two incomes would typically have had to use 37.8% of their after tax pay in March to service the mortgage on a median priced house. This is up from 36.2% the previous month.

On this basis, most New Zealand cities have a household affordability index below 40% for couples in the 30-34 age group. This household is assumed to have one 5 year old child.

For households in the 25-29 age group (which is assumed to have no children), affordability also worsened, with 23.7% of after tax income in households with two incomes required to service the debt, up from 22.3% the previous month.

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.

First home buyer household affordability is measured by calculating the proportion of after tax pay needed by two young median income earners to service an 80% home loan on a first quartile priced house.

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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

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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