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House prices drive affordability improvement

For August 2008

Falling house prices and interest rates drive record affordability improvement

Housing affordability improved by a record amount in August to its best level since January last year after house prices fell sharply and fixed mortgage rates fell below 9%, the Wizard Home Loans Affordability report shows.

The national median house price fell 2.9% in August and the average 2 year fixed mortgage rate fell 13 basis points to 8.96%, adding to the benefits from a slight increase in disposable income because of wages growth.

Tax cuts on October 1 and further falls in house prices are expected to improve affordability significantly over the rest of 2008 and through the spring when many home sellers put their houses on the market.

This monthly report measures the proportion of a single 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 74.2% of the median take-home pay to service the mortgage on the median house in August, down from 77.4% in July. This 3.2% improvement was more than double the previous record improvements of 1.5% each in May and June of this year.

Affordability is now at its best level since January 2007, but remains well above the 40-50% levels seen in 2002, 2003 and 2004 before house prices took off.

"Tax cuts due on October 1 and the lower prices being offered in the housing market are likely to further improve affordability through the rest of this year," said John Grant, Wizard Home Loans, Director, New Zealand Business.

"Spring seems finally to have sprung for housing affordability," Grant said.

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 59.3% in August from 61.1% in July and is also back at its best levels since January 2007.

Affordability looks set to improve through the rest of 2008 as interest rates fall at the same time as 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. Nominal wages are also rising relatively fast.

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 mid-2008. House prices rose 64% between November 2003 and November 2007. In July 2003 the affordability ratio stood at 43.9%.

Most home-buyers are still forced to pool almost two median incomes to afford the mortgage on the median house, although that multiple has dropped from 2.1 in November last year to 1.85 in August.

The biggest driver in the improvement in August was the fall in house prices, although the 13 basis point drop in the average 2 year fixed mortgage rate was also a major driver.

The Reserve Bank of New Zealand cut the official cash rate from 8% to 7.5% last week and its own forecast track implies it will fall to around 6.5% over the next year. Banks passed on around half of last week's cut in the former of lower fixed mortgage rates. About 87% of all mortgages in New Zealand are on fixed rates.

There remains some doubt, however, about how quickly banks can cut their fixed mortgage rates given the turmoil on global financial markets that has increased the international funding costs for New Zealand's banks.

The Reserve Bank's own forecasts are that the effective mortgage rate, which takes into account the actual costs of the various tranches of mortgages issued, will only drop from 8.8% to 8.7% over the next two years.

Every region reported improvements in housing affordability except Southland, where house prices bounced in August.

The biggest improvements in home loan affordability were in Northland and Central Otago Lakes (Queenstown and Wanaka) where house prices fell 9.5% and 17.7% respectively in August.

Southland's affordability at 46.7% remains the best in New Zealand, although it was up from 42.8% in July. Central Otago Lakes at 112.9% remains the least affordable, although its affordability has improved from 138.9% in July.

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.

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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