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Housing affordability has been worse

Housing affordability has been worse

In terms of servicing a mortgage, first-time home buyers are less stretched now than they were in the mid-1980s, according to Infometrics economist Gareth Kiernan.

Back in 1987, the average first-time house buyer was forking out half their income on mortgage interest payments. Today that ratio is 36% (about one-tenth higher than the average of the last 30 years), reflecting the availability of low fixed-rate mortgages. The ratio rises to 40% if first-time house buyers rely totally on floating rate mortgage debt.

Although housing is apparently outrageously unaffordable, there are two key reasons why the 1980s were tougher for buyers. The most obvious is interest rates – today’s fixed mortgage rates of 8% are nothing compared to the 20%pa charged in the mid-1980s.

The second factor is the changing dynamics of the labour market – there are more two-income households. This implies that individual income is not an appropriate measure for judging affordability. Add in the confidence generated by low unemployment and good job security and it is easy to see why people are willing to pay high prices for property.

“The issue of indebtedness raised by Alan Bollard over the last couple of months has some validity,” says Mr Kiernan. “The effective mortgage rate would need to rise to only 11.6% (rather than 20%) for households to be as stretched as they were in 1987.” But for fixed mortgage rates to climb that far, wholesale bond rates would need to reach double digits for the first time since 1991.

Mr Kiernan says that scenario is very unlikely. “We conclude that mortgage holders are stretched, but not to breaking point.”


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