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Price falls no help to home loan affordability

Media release by

Embargoed until 1 pm Saturday, 26 January 2008

Fairfax Media home loan affordability reports

for December 2007

House price falls no help to home loan affordability

House prices may be falling and wages improving, but higher interest rates kept New Zealand home loan affordability near its worst levels ever in December, according to the monthly Fairfax Media Home Loan Affordability report. Affordability for first home buyers remained at a record low.

Affordability worsened sharply to in Auckland, Waikato, Nelson/Marlborough, Manawatu/Wanganui and Otago in December as higher house prices in those regions compounded the damage from rising fixed mortgage rates.

The proportion of median take home pay needed to service the mortgage on a median priced home in Auckland topped the 100% mark in December, taking it into the territory previously occupied only by Queenstown and the Central Otago Lakes region.

Areas where affordability improved slightly were Southland, which remains the least unaffordable region in New Zealand, Wellington and Taranaki. House price falls in these regions were enough to outweigh the effects of higher interest rates.

Nationally, the proportion of take-home pay required by a median income earner fell very slightly from 83.5% to 81.9% to make a mortgage payment on a median priced house purchased in December. But in Auckland the proportion hit 101.4% and in Waikato it hit 83%, a record high.

The report follows the Demographia survey showing New Zealand had the least affordable housing in the English-speaking world alongside Australia. That survey used data gathered to the end of the September quarter and before house prices fell in the final quarter of 2007. The Fairfax Media Home Loan Affordability report shows that house price falls since that survey have done little to improve affordability.

Interest rates for a 2 year fixed-rate mortgage topped 9.35% in December. (They have since gone higher still in January 2008 after banks cited financial market volatility for higher wholesale interest rates. This means affordability is likely to have worsened again in January unless house prices fall sharply.

It takes almost 2.1 median incomes in a household to afford the mortgage for a median priced house. Nationally, that means an after-tax household income of $1,373 per week. This is up from 1.8 incomes just one year ago. Five years ago, only 1.1 median incomes were required.

Home loans are becoming less affordable, excluding more and more families from the benefits of home ownership.

Even without factoring in the impact of rising interest rates, houses remain seriously unaffordable. It still takes 10 year of median after-tax take-home pay to buy a median-priced house in December. This is basically unchanged since March 2007. But it is up dramatically from five years ago, when it only took six and a half years of take-home pay to buy a median priced home.

House prices have actually changed little over the past ten months. But they are at levels where stability does very little for affordability. And, interest rates continue to rise, with the very real prospect that they will continue that rise in 2008.

There are different impacts regionally. Affordability improved in five regions, but got worse in seven regions. The “least unaffordable“ regions are still Manawatu/Wanganui in the North Island, and Southland in the South Island. The “most unaffordable” regions remain Auckland in the North Island, and the Central Otago Lakes in the South Island.

In fact, in Auckland it now takes 101.4% of take-home pay from one median income to be able to afford the mortgage on a median priced house purchased in December. But there were significant corrections in Wellington, where it fell from 86.9% in November to 81.6%, and in Southland, even though it is the least unaffordable region, where it fell from 54.7% of one median income, to 50.1%.

The affordability crisis has built up over the past five or so years. But it will likely take at least twice as long to remedy – if action is taken. Without action, it could become an embedded social problem.

The unavailability of affordable first homes is a serious issue, cause almost solely by the unintended consequences of public policy decisions. We have been under-building this type of housing on our urban fringes for years. The core cost that makes fringe housing unaffordable is the land value, and this is kept high by deliberate limits on supply. New Zealand benchmarks very poorly internationally on the availability of affordable first homes, and unfortunately current public policy is sure to make things even worse.


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