Housing Minister's claim homes are more affordable now than when Labour was in government only tells part of the story

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PLEASE NOTE: The full suite of Reports for a) First home buyers (aged 25-29 yrs), both as individuals and as a couple, and b) Young family buyers (aged 30-34), both as individuals and as a couple (with one partner working full time, one half time, and a 5 year old child), are now published on our website.

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Earlier this month Housing Minister Nick Smith told Parliament housing was now 24% more affordable than it was in 2008, when Labour was in government.

In making the claim he pointed to interest.co.nz's Home Loan Affordability Reports (previously called the AMP360 Home Loan Affordability Reports), which track movements in house prices, incomes and mortgage interest rates to give monthly measures of affordability throughout the country.

Since interest.co.nz began producing the reports in 2007 they have regularly been quoted in parliamentary debates by politicians on both sides of the house.

But Smith's claim that housing is now 24% more affordable than it was when Labour was in government would have taken many by surprise, given the extraordinary increase in house prices that has occurred over the last couple of years.

So how well does the Housing Minister's claim stack up?

The Home Loan Affordability reports contain a great deal of data that can be sliced and diced in various ways, but the information in them that is probably the most relevant to the current housing debate is the section on affordability for first home buyers.

This tracks regional movements in the lower quartile selling prices around the country and matches these with the movements in the median after tax income for couples aged 25-29 in the same regions, to estimate how much of their weekly income would be taken up by mortgage payments.

The reports show that in April 2008 the mortgage payments on a lower quartile-priced home would have taken up 33.9% of typical first home buying couple's after tax pay.

But in April this year, that percentage had dropped to just 22.8%, driven mainly by declining mortgage interest rates, with the average two year fixed rate dropping from 9.61% in April 2008 to 4.47% last month.

Which suggests the Minister was correct.

By that measure housing is more affordable now than it was back in 2008.

Affordability has worsened in Auckland

However he should probably hold off on breaking out the Champagne, because those figures only tell part of the story.

Although they show that housing affordability has improved over the last eight years, they are national figures and do not reflect the situation in Auckland, which is the only region in the country where affordability, or the lack of it, has become a major issue.

In Auckland, the amount of money typical first home buyers would need to set aside for mortgage payments on a lower quartile-priced home has risen from 48.8% in April 2008 to 50.5% in April 2016.

So affordability has worsened in Auckland over the last eight years, even though mortgage interest rates have more than halved in that time.

Although the decline in affordability seems relatively modest, it masks a bigger underlying problem.

Between April 2008 and April 2016 the lower quartile selling price of homes in Auckland increased from $353,600 to 666,600, up 88.6%.

Over the same period, the median take home pay of an Auckland couple aged 25-29 increased from $1297 to $1579 a week, up just 21.7%.

Which means house prices in Auckland have increased at more than four times the rate of incomes for typical first home buyers.

That creates problems for first home buyers trying to save a deposit.

The Home Loan Affordability Reports track how much money typical first home buyers would have to put towards a deposit, if they saved 20% of their take home pay for four years and earned interest on it at the prevailing 90 day bank deposit rate.

In April 2008 that would have given them $59,528 to put towards a deposit, which would have been 16.8% of the price of a lower quartile-priced home.

In April 2016 they would have saved $72,228, which is more money than in 2008, but house prices in Auckland have risen so much that it would be just 10.8% of the [price of a lower quartile-priced home.

That contrasts sharply with the figures for the whole of the country.

They show that in April 2008, typical home buyers would have saved a 22.6% deposit for lower quartile priced house,and in April 2016 that figure had declined only marginally to 22.1%.

So while the national figures show that first home buyers should be able to save a 20% deposit for a home within four years, in Auckland they would have saved only slightly more than 10% of the purchase price.

Out of kilter

That illustrates how far out of kilter the Auckland housing market has become compared with the rest of the country.

And because first home buyers outside of Auckland are more likely to have a deposit of at least 20%, they are also more likely to qualify for the extra low "special" mortgage interest rates that banks advertise from time to time, while typical Auckland first home buyers probably wouldn't qualify because of their low deposit, compounding their problems.

But perhaps the most worrying change in Auckland's housing market over the last eight years is the amount of debt first home buyers need to take on to get into their own home.

In April 2008, if typical first home buyers in Auckland had saved a deposit of 16.8% of the purchase price of a lower quartile-priced home, they would have needed to borrow $294,072, which would have been been 4.4 times their annual take home pay.

But in April this year they would only have a deposit equivalent to 10.8% of a much higher purchase price and would need to borrow $594,372 to buy a lower quartile-priced home.

That is 7.2 times the annual take home pay of typical first home buyers and is a worrying large amount of debt for young couples to take on to get into their own home.

So are first home buyers in Auckland better off now than they were in 2008?

By almost any measure you care to use the answer would be no.

They are likely to be considerably worse off than they were in 2008.

ENDS

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