Home loan affordability worsens as house prices rise
Roost Home Loan Affordability Report
For August 2013 – For immediate release
Home loan affordability worsens as house prices rise
Home loan affordability worsened slightly in August after house prices rose again, more than offsetting marginal improvements in incomes and the effects of near record low interest rates for borrowers with large deposits.
Mortgage brokers report bank lending to those with a deposit of less than 20% of the value of a home has virtually ground to a halt in recent weeks as banks adjust to the late August announcement by the Reserve Bank of a 'speed limit' on high Loan to Value Ratio (LVR) loans.
Banks have already begun offering preferentially low interest rates to borrowers with more than 20% equity and are imposing 'low equity premiums' on borrowers with less than 20% equity. Some are rejecting applications from those wanting to borrow more than 80%.
"Borrowers with more than 20% equity are in a much stronger position to negotiate good deals with banks and that's where a mortgage broker can help," said Roost Mortgage Brokers spokeswoman Colleen Dennehy. "Banks are taking much less of a one-size-fits-all approach and that means some borrowers are having to negotiate harder to get what they want," Dennehy said.
The Roost Home Loan Affordability reports show national affordability worsened to 56% in August from 55.4% in July after the national median house price rose to NZ$390,000 from NZ$385,000 the previous month. The reports show improvements in 9 regions and deteriorations in 15 regions, largely due to movements in house prices in those areas. The reports measure the percentage of after tax pay needed to service an 80% mortgage on a median priced house.
The Roost Home Loan Affordability report for August showed affordability for regular home buyers improved in Hamilton, Rotorua, Wanganui, Kapiti Coast, Timaru, Queenstown and Invercargill, but worsened across all parts of Auckland, Tauranga, Napier, Wellington and Christchurch.
It is toughest for first home buyers in Auckland. It took 92.2% of a single median after tax income to afford a first quartile priced house in South Auckland in August, while it took 102.1% in the North Shore.
Affordability on the North Shore is at its worst level in more than 3 years.
Nationally, affordability for someone on a single median income worsened by 0.6% in August from July, which meant it took 56% of after tax income to afford an 80% mortgage on a median house, according to the Roost home loan affordability report released today.
Average fixed mortgage rates, which more than 50% of new borrowers now use, rose slightly in August and after-tax wages rose less than NZ$1 per week.
Housing affordability has become a major economic and political issue over the last year. The Reserve Bank and Government agreed on a toolkit of 'macro-prudential' controls in May that would see the central bank impose limits growth in high loan to value ratio mortgages. Central and local governments are also moving to address housing supply shortages.
For first home buyers – which in this Roost index are defined as a 25-29 year old who buys a first quartile home – there was also a deterioration in affordability in most cities.
It now takes 46.9% of a single first home buyer's income to afford a first quartile priced house nationally, up from from 46.2% a month earlier. The most affordable city in New Zealand for first home buyers is Wanganui, where it takes 15.5% of a young person's disposable income to afford a first quartile home. The least affordable is the North Shore of Auckland at 102.1%.
Any level over 40% is considered unaffordable, whereas any level closer to 30% has coincided with increased buyer demand in the past.
For working households, the situation is similar, although bringing two incomes to the job of paying for a mortgage makes life considerably easier. A household with two incomes would typically have had to use 36.9% of their after tax pay in August to service the mortgage on a median priced house. This is up from 36.4% in July.
On this basis, most smaller New Zealand cities have a household affordability index below 40% for couples in the 30-34 age group. This household is assumed to have one 5 year old child.
For households in the 25-29 age group (which are assumed to have no children), affordability nationally worsened to 23.1% of after tax income in households with two incomes required to service the debt, up from 21.8% the previous month.
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.
First home buyer household affordability is measured by calculating the proportion of after tax pay needed by two young median income earners to service an 80% home loan on a first quartile priced house.
Roost 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
interest.co.nz work out these
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
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
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%.
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