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Affordability report: record improvement

Media release by Wizard Home Loans and, July 18, 2008

Wizard Home Loans Affordability report

For June 2008

Double whammy of falling house prices and lower interest rates drive record improvement in home loan affordability

Falling interest rates and lower house prices improved housing affordability in June to its best level since February 2007, the Wizard Home Loans Affordability report shows. The improvement in June was the biggest in the 6 and a half year history of the report.

This monthly report measures the proportion of a median after tax income needed in each part of New Zealand to service an 80% mortgage on the median house price in that region.

The Wizard Home Loans Affordability report shows it took 78.5% of the median take-home pay to service the mortgage on the median house in June, down from 80.6% in May and down from a peak of 83.8% in November last year. The previous best level of affordability was in February last year when the affordability ratio stood at 74.7%.

The report also shows the proportion required for a first home buyer (someone aged 25-29 that has saved 20% of their after tax income in the previous five years) buying a cheaper house (first quartile price). The first home buyer’s affordability ratio improved to 69.1% in June from 70.6% in May and is also back at its best levels since February 2007.

Affordability looks set to improve through the rest of 2008 as interest rates either fall or are stable while house prices keep falling. Tax cuts due from October 1 are also expected to improve affordability ratios as take-home pay rises slightly for most home-buyers.

“Housing affordability is now improving rapidly as the double impact of lower interest rates and lower house prices drive down debt servicing costs,” said John Grant, Wizard Home Loans, Director, New Zealand Business.

“Buyers are in control in the housing market and the prospect of lower interest rates and even lower house prices will make it easier for New Zealanders to get into this market,” Mr Grant said.

The improvement in affordability in June was the biggest in the history of the report measuring affordability back to January 2002.

However, housing affordability remains much worse than before the housing boom took off in late 2003 and before interest rates rose from under 7% in 2003 to over 9% in 2008. House prices rose 64% between November 2003 and November 2007.

Most home-buyers are still forced to pool around two median incomes to afford the mortgage on the median house.

The biggest drivers in the improvement in June were a fall in the average two year fixed mortgage rate to 9.2% from 9.4% in May. Interest rates have fallen over the last three months as news of an economic slowdown has intensified, along with speculation that the Reserve Bank of New Zealand may be able to cut the official cash rate from 8.25% as early as July 24.

The median house price fell to NZ$340,000 in June from NZ$345,000 in May, and is down 3.4% from the peak in house prices in November last year.

The biggest improvements in home loan affordability were in Manawatu/Wanganui and Taranaki where house prices fell sharply.

Eleven out of the 12 regions posted improvements in affordability. The only region to see affordability worsen was Waikato/Bay of Plenty, where the affordability ratio worsened to 77.1% in June from 76.5% in May because of a higher median house price.

Note to editors: The Housing affordability series from was first published in February last year and was sponsored by Fairfax Media up until May this year. It is now sponsored by Wizard Home Loans.

Home loan affordability for typical buyers

General/New Zealand Report:

Links to individual reports for regions can be found here

Home loan affordability for first-home buyers

General/New Zealand Report:

Links to individual reports for regions can be found here

Question and Answers about the report

How does work out these numbers? 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. 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%.


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