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Roost Home Loan Affordability report for April 2014

Roost Home Loan Affordability report for April 2014

NZ home loan affordability improves, but South Auckland most expensive for first home buyers

Home loan affordability improved slightly across most of New Zealand in April as a fall in median house prices was enough to offset the effects of a second rise in floating mortgage rates in as many months.

But a jump in house prices and stagnant wages in South Auckland meant the Manukau region became the most expensive market in the country relative to incomes for first home buyers. It took the top spot off the North Shore and is now more expensive relative to incomes than Queenstown.

A 1.8% fall in the national median house price in April from March drove the national improvement, helping to compensate for the effects of 0.5% of official interest rate increases since early March.

The Roost Home Loan Affordability reports show improvements in the month in 13 of the 24 regions measured. The Roost reports have been referred to repeatedly in and out of Parliament in recent weeks as the debate over housing affordability heats up before the September 20 election.

Banks passed on the increase to floating mortgage borrowers and average fixed mortgage rates have risen around 0.7% in the last year in anticipation of the Reserve Bank's tightening. The Reserve Bank's imposition of a speed limit on low deposit mortgages in October has also cooled activity and prices in the housing market in recent months.

However, banks are increasing their appetites to lend to both high and low deposit borrowers and brokers report banks are competing more aggressively to recruit and retain customers.

"The banks are working very hard to win customers and grow lending, which means they are offering deals to the best customers who push hard through their brokers," said Roost Home Loans spokeswoman Colleen Dennehy.

The Roost Home Loan Affordability reports show national affordability improved to 62.0% in April from 62.1% in March after the national median house price fell to NZ$432,250 from NZ$440,000 in March.

Floating mortgage rates have risen an average 43 basis points since early March to 6.21%, while advertised 2 year mortgage rates haven risen from 5.4% a year ago to 6.13% by the end of April. However, advertised two and three year rates have been edging down in recent weeks as the longer term view for interest rates has flattened. Banks are aggressively promoting and pricing their three-year deals.

The Roost Home Loan Affordability reports for April showed affordability for regular home buyers worsened in 11 cities, including Manukau, New Plymouth, Gisborne, Wellington, Christchurch, Nelson and Invercargill as median prices rose. But they improved in Whangarei, Auckland City, North Shore, Tauranga, Dunedin and Queenstown, where median prices fell.

It was toughest for first home buyers in Manukau, which took the mantle as the most expensive area off the North Shore of Auckland for the first time in April. It took 102.4% of a single median after tax income to afford a first quartile priced house in Manukau. This followed a 16% rise in the first quartile house price in the area in the last year.

Housing affordability has become a major economic and political issue over the last 18 months. The Reserve Bank and Government agreed on a toolkit of 'macro-prudential' controls a year ago that would see the central bank impose limits growth in high LVR mortgages and force banks to hold more capital. Central and local governments are also moving to address housing supply shortages. The Reserve Bank's speed limit was applied on October 1 and it said in its May Financial Stability report it appeared to have worked to reduce house price inflation by around 2.5 percentage points.

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 a worsening in affordability in 13 of the 24 regions covered, but the national measure improved a bit.

It took 50.8% of a single first home buyer's income to afford a first quartile priced house nationally, down from 51.8% a month earlier. The most affordable city for first home buyers was Wanganui, where it took 22.1% of a young person's disposable income to afford a first quartile home. The least affordable was Manukau at 102.4%.

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 40.7% of their after tax pay in April to service the mortgage on a median priced house. This is down from 41.4% the previous month.

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 first-home buying households in the 25-29 age group (which are assumed to have no children), affordability nationally improved to 24.6% of after tax income in households with two incomes required to service the debt, down from 25.1% the previous month. The lower quartile house price fell to NZ$290,000 from NZ$295,000 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 typical buyers
General/New Zealand Report:
Links to individual reports for regions can be found here

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

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%.

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


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