July 20, 2011

Low rates mean first home buyer affordability best since late 2004

Continued low interest rates and slight increases in after tax income helped improve first buyer affordability in June to its best levels since late 2004, Roost Home Loan Affordability report shows.

The prices of cheaper homes remained flat, helping affordability for younger double income households in most parts of the country.

Central Auckland affordability remains difficult as prices remain firm, but record low interest rates continue to keep affordability at its best levels in 7 years in most other parts of the country. Invercargill is the most affordable city in the country, while Queenstown is the least affordable.

Floating mortgage rates are at multi-decade lows, although home buyers are increasingly viewing the prospect of higher interest rates later year as the Reserve Bank tries to contain inflation in a recovering economy. Some banks continue to offer rate and fee discounts to try to boost weak loan growth.

“Banks are competing hard for first home buyers and investors alike,” said Rhonda Maxwell, spokeswoman for mortgage broking group Roost Home Loans.

Banks are offering loan to value ratios of up to 90 and 95% and are discounting establishment and legal fees in competitive situations, Maxwell said.

“Home loan affordability ratios are the best we’ve seen in seven years, but the interest rate outlook is beginning to change,” Maxwell said. “Now is the time home buyers can get the most out of advice from a mortgage broker,” she said

Stronger than expected growth and inflation figures in the last week have prompted economists to bring forward their forecasts for the Reserve Bank’s first cash rate hike to October or December from January.

A young couple earning the median wage could afford to buy a first quartile priced house in June, with 21.0% of their disposable income required to service an 80% mortgage. This is down from 21.1% in May and down from a June 2007 high of 35.1%. It is at its best levels since November 2004.

The national median house price rose to NZ$360,000 in June from NZ$350,000 in May and is just off a record high of NZ$365,000 in March. The first quartile house price edged up to NZ$249,000 from NZ$248,750 in May.

The Roost Home Loan Affordability report measures affordability nationally and regionally for individual income earners and households, taking into account median house prices, interest rates and incomes.

The Roost Home Loan Affordability measure for all of New Zealand showed the proportion of a single median after tax income needed to service an 80% mortgage on a median income was 52.6% in June from 51.3% in May. The worst level of affordability was 83.4% seen at the peak of the house price boom in March 2008 when 2 year mortgage rates were close to 10%.

Affordability has been improving since December 2009 as house prices have flattened out and interest rates have fallen, the monthly measure calculated by interest.co.nz in association with Roost shows.

More than 50% of home owners are now on floating mortgages and most new borrowers are choosing to float, given floating rates at around 5.75% are cheaper than average longer term fixed rates at around 6.2%. The Home Loan Affordability reports are use the floating rate.

Affordability is difficult in Auckland, Wellington, Christchurch, Hamilton and Tauranga for those on a single median income, but homebuyers in smaller provincial cities will find home ownership much more affordable. Households with two incomes are also in a stronger position, particularly those bidding for homes priced in the lower quartile.

Affordability for households with more than one income deteriorated slightly because higher incomes were outweighed by the effects of a small rise in median house prices. This measure of a ‘standard typical household' found the proportion of after tax income needed to service the mortgage on a median house was 34.6% at the end of June from 34.6% in May and a record high of 54% in November 2007.

This measure assumes one median male income, half a median female income aged 30-35 and a 5 year old child that receives Working-for-Families benefits. Any level over 40% is considered unaffordable for a household, whereas any level closer to 30% has coincided with increased buyer demand in the past.

The survey’s measure of a ‘standard first-home-buyer household' found the proportion of after tax income needed to service the mortgage on a first quartile home fell to 21.0% in June from 21.1% in May and a record high of 34.9% in November 2007.

This measure assumes a first home buyer household includes a median male income and a median female income aged 25-29 with no children. 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.

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

ENDS

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