Home loan affordability worsens as house prices rise

Roost Home Loan Affordability report

For January 2014 - for immediate release

Home loan affordability worsens as house prices rise

The full media release is attached which includes important additional information, including links to all Regional Reports ... Here is an extract.

Home loan affordability improved across most of New Zealand in January to its best level in five months as the Reserve Bank's speed limits on low deposit loans helped drive down median prices in the hottest markets.

An 8.6% fall in the national median house price improved affordability to its best level since August 2013 and was helped by a slight increase in earnings. Affordability improved in 20 of the 24 housing areas measured in the Roost Home Loan Affordability reports.

Sales volumes and medians fell in the biggest cities in January, which was the fourth month of the restrictions of mortgages with loan to value ratios of over 80%. A rise in average fixed mortgage rates in December in anticipation of a March hike in the Official Cash Rate was also a factor dampening demand. However, banks have begun offering lower special fixed rates again through mid February as wholesale interest rates have softened in line with slowing emerging market economies and subdued inflation in New Zealand.

"Banks are keen to lend to borrowers with higher deposits and will do special deals for others with the right advice," said Roost Home Loans spokeswoman Colleen Dennehy.

The Roost Home Loan Affordability reports show national affordability improved to 57.0% in January from 60.7% in December after the national median house price fell to NZ$402,000 from NZ$427,000 in December. The reports measure the percentage of after tax pay needed to service an 80% mortgage on a median priced house.

The Roost Home Loan Affordability reports for January showed affordability for regular home buyers improved in all 24 cities except Whangarei, Napier, Wellington City and Invercargill.

It remained toughest for first home buyers on the North Shore in Auckland. It took 102.1% of a single median after tax income to afford a first quartile priced house on the North Shore in January, although this improved from 103.5% in December.

Fixed mortgage rates, which more than 50% of new borrowers now use, were flat in January, but have eased back slightly in mid February. Variable rates were unchanged, but are expected to rise in line with the Official Cash Rate. The Reserve Bank is forecast to increase the rate by 1 percentage point in 2014, and a further 1 percentage point in 2015.

Housing affordability has become a major economic and political issue over the last year. 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 and force banks to hold more capital. Central and local governments are also moving to address housing supply shortages. The Reserve Bank's speed limit was applied on October 1.

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 an improvement in affordability in 21 of the 24 regions covered.

It took 47.5% of a single first home buyer's income to afford a first quartile priced house nationally, down from 51.5% a month earlier and the best level since July last year. The most affordable city for first home buyers was Wanganui, where it took 19.7% of a young person's disposable income to afford a first quartile home. The least affordable was the North Shore of Auckland at 102.1%.

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 37.5% of their after tax pay in January to service the mortgage on a median priced house. This is down from 39.9% the previous month.

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 first-home buying households in the 25-29 age group (which are assumed to have no children), affordability nationally improved to 22.9% of after tax income in households with two incomes required to service the debt, down from 24.9% the previous month. The first quartile house price fell to NZ$275,000 from NZ$295,000 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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