Home loan affordability worsens after rise in interest rates

NZ home loan affordability worsens after rise in interest rates

Home loan affordability worsened slightly across most of New Zealand in May as a rise in interest rates more than offset a small fall in median house prices.

The Roost Home Loan Affordability Reports showed a deterioration in 16 of 24 regions, including on the North Shore of Auckland, which reclaimed the title of the being the least affordable area for first home buyers in New Zealand.

A 0.5% fall in the national median house price in May from April was not enough to compensate for the two increases in the Official Cash Rate in March and April. Advertised floating mortgage rates rose almost half a per cent to around 6.25% in the first six months of 2014. They have since risen another 0.25%.

The Roost Home Loan Affordability reports showed improvements in the month in 8 of the 24 regions measured. The Roost reports have been referred to repeatedly in and out of Parliament in recent months as the debate over housing affordability heats up before the September 20 election.

Banks have been more aggressive in recent months in offering cut-rate longer-term fixed mortgage rate deals, passing on the benefits of low international and local funding costs. Average two year fixed mortgage rates fell 13 basis points to almost 6% in May, taking two year rates well below floating rates on 6.25% by the end of May. Floating rates have since risen to around 6.5%.

"The shift in longer term fixed rates to substantially below floating rates has changed the landscape for borrowers," said Roost Home Loans spokeswoman Colleen Dennehy. "Talking to a mortgage broker can help a borrower consider their options, and get the best deal out of a bank," Dennehy said.

The Roost Home Loan Affordability reports show national affordability deteriorated to 63.1% in May from 62.5% in April after the national median house price fell to NZ$432,000 from NZ$432,250 and the average floating mortgage rate rose to 6.23% from 6.05% a month earlier.

The Roost Home Loan Affordability reports for May showed affordability for regular home buyers worsened in 16 cities and regions, including Central Auckland, Whangarei, Tauranga, Hamilton, Wellington City, Christchurch, Dunedin and Queenstown. But they improved in Manukau, Gisborne, New Plymouth, Nelson and Invercargill.

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It was toughest for first home buyers on the North Shore of Auckland, which reclaimed its mantle as the most expensive area relative to incomes from Manukau in April. It took 109.9% of a single median after tax income to afford a first quartile priced house on the North Shore, up from 103.1% the previous month.

Housing affordability has become a major economic and political issue over the last 18 months. The Reserve Bank and Government agreed on a toolkit of 'macro-prudential' controls a year ago that would see the central bank impose limits growth in high LVR 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 and it said in its June Monetary Policy Statement it appeared to have worked to reduce house price inflation by around 2.5 percentage points.

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 a worsening in affordability in 13 of the 24 regions covered and the national measure also worsened.

It took 51.3% of a single first home buyer's income to afford a first quartile priced house nationally, up from 51.2% a month earlier. 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 North Shore at 109.9%.

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 41.4% of their after tax pay in May to service the mortgage on a median priced house. This is up from 41.0% 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 worsened to 24.9% of after tax income in households with two incomes required to service the debt, up from 24.8% the previous month. The lower quartile house price fell to NZ$287,000 from NZ$290,000 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.

Roost Home loan affordability for typical buyers
General/New Zealand Report: 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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