Home loan affordability worsens as loan limits near

Roost Home Loan Affordability report   

For June 2013 – For immediate release

Home loan affordability worsens as loan limits near

Facing the worst home loan affordability in three years, first home buyers are now having to scramble to get low deposit loans ahead of an expected clampdown by the Reserve Bank.

Mortgage brokers report banks are toughening their lending criteria and reapplying penalty interest rates for low deposit borrowers ahead of an announcement expected within weeks of a 'speed limit' on the growth of low deposit lending.

Application waiting times have increased in recent weeks as banks look to ration their low deposit lending and slow lending growth.

The scramble for loans and the uncertainty over the Reserve Bank's speed limit has darkened the outlook for borrowers just as the Roost Home Loan Affordability reports showed a further slight worsening in June, thanks to another rise in house prices.

"Banks have certainly toughened their decision making in recent weeks as they prepare for the Reserve Bank's restrictions," said Roost Mortgage Brokers spokeswoman Colleen Dennehy.

"Borrowers who have expert advice from a mortgage broker will find it easier to negotiate in this more complicated environment," Dennehy said.

The Roost Home Loan Affordability report for June showed affordability for regular home buyers worsened across most of the country and remains at its toughest in the biggest cities of Auckland, Christchurch and Wellington, where housing supply shortages and a fall in fixed mortgage rates over the last year have heated up the housing market.

Life looks set to get even tougher for first home buyers in the big cities if, as expected, the Reserve Bank puts 'speed limits' on the growth of low deposit home loans and does not include exemptions for first home buyers. About a third of mortgages with deposits of less than 20% are to first home buyers.

Roost Mortgage Brokers had already seen some banks tighten their rules around low deposit lending over the last 6 weeks in response to Reserve Bank pressure, she said. Some banks had reduced their availability of 80% plus mortgages through tougher lending criteria or effectively increased interest rates for very low deposit mortgages.

The Roost Home Loan Affordability reports showed a slight deterioration in Taranaki, Wellington, Canterbury, Otago and Southland because of higher house prices. Affordability worsened more markedly in all parts of Auckland except West Auckland because of house price inflation that is running at an annual rate of almost 20%.

Only interest rates remaining near record lows is stopping a further worsening, the Roost Home Loan Affordability reports show.

It is toughest for first home buyers in Auckland. It took 89.9% of a single median after tax income to afford a first quartile priced house in South Auckland in June, while it took 99.9% in the North Shore.

Affordability on the North Shore is at its worst level in 3 years, 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%.

Nationally, affordability for someone on a single median income worsened by 0.2% in June from May, which meant it took 56.5% of after tax income to afford an 80% mortgage on a median house, according to the Roost home loan affordability report released today.

Fixed mortgage rates, which more than 50% of new borrowers now use, rose slightly in June and after-tax wages rose just over NZ$1 per week. A rise in the national median house price to NZ$394,000 in June from NZ$392,000 in April was the main cause of the deterioration.

Housing affordability is shaping up as a major economic and political issue. The Reserve Bank and Government agreed on a toolkit of 'macro-prudential' controls in May that would see the central bank impose limits growth in high loan to value ratio mortgages. Central and local governments are also moving to address housing supply shortages. Opposition parties have called for the bank to exempt first home buyers.

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 in affordability in most cities.

It now takes 48.3% of a single first home buyer's income to afford a first quartile priced house nationally, unchanged from 48.3% a month earlier, but first home buyer affordability worsened in the three biggest cities of Auckland, Christchurch and Wellington. The most affordable city in New Zealand for first home buyers is Wanganui, where it takes 22.4% of a young person's disposable income to afford a first quartile home. The least affordable is the North Shore of Auckland.

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 37.1% of their after tax pay in May to service the mortgage on a median priced house. This is up from 37.0% in April.

On this basis, most smaller 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 nationally was unchanged at 23.4% of after tax income in households with two incomes required to service the debt.

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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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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