Home Loan Affordability report from interest.co.nz

Home Loan Affordability report from interest.co.nz

For February 2008

for IMMEDIATE release

Home loan affordability steady at best level in 4 years, but trend improving
The New Zealand Housing Affordability measure from interest.co.nz was largely unchanged in February as a small rise in the median house price offset the benefits of another fall in mortgage rates.

The pause in the improving trend for housing affordability is not expected to last for long given predictions that house prices and interest rates will fall further later this year. Fresh tax cuts later in 2009 will also increase take-home pay and improve affordability.

Affordability recovered dramatically through 2008 as both the slumping housing market and an unprecedented fall in fixed mortgage rates made it easier for both first home buyers and established households to buy houses. A reduction in tax rates and income thresholds also helped lift disposable incomes.

Interest.co.nz is predicting that housing is likely to be largely affordable for most first home buyers by the end of 2009 if house prices keep falling, interest rates fall further and tax cuts are implemented.

“Affordability for most home buyers has improved dramatically and will continue to get better through the rest of 2009 as house prices ease and take-home pay improves, thanks to expected tax cuts,” said Interest.co.nz Editor Bernard Hickey.

“The only complication for first home buyers is the increasing requirement by banks for a deposit of 20% or more, which is making housing effectively less affordable,” Hickey said.

The REINZ median house price rose to NZ$330,000 from NZ$325,000 in January, eating up the benefits from a drop in the average 2 year mortgage rate for new borrowers to 5.92% from 6.10% the previous month.

The proportion of an after-tax median income needed to service the mortgage for the median house fell to 54.0% in February from 54.1% in January. This is down from a peak of 82.9% in November 2007 when the median house price was NZ$352,000 and the 2 year fixed mortgage rate was at 8.75%.

However, affordability remains slightly out of reach for most individual home buyers. The threshold proportion of after tax income considered prudent to sustainably own a house is around 40%. Anything above that is starting to become unaffordable.

The Housing Affordability report’s measure of affordability for a typical first home buyer shows the mortgage servicing proportion at 47.1% in February, up slightly from 46.8% in January and down from 70.1% a year earlier. This measure is for a median income earner aged 25-29 buying a first quartile home. Interest.co.nz thinks the ‘affordable’ threshold is 40% for such a home buyer.

The report’s measure of affordability for a ‘typical’ household shows that proportion dropped to 35.3% in February from 35.4% in January. This is down from 52.3% a year ago and a peak of 54.1% in March 2008. This ‘typical’ household includes one 30-34 year old male earning a median income, one 30-34 year old female earning 50% of a medium income and one child over five. Interest.co.nz thinks the ‘affordable’ threshold is 30% for such a household.

The report’s measure of a ‘typical’ first home buying household shows the proportion required to buy the first quartile home increased slightly to 22.3% in February from 22.1% in January. It has, however, improved from 33.1% a year ago and 34.9% at its peak in November 2007. This measure is for one full time male aged 25-29 and one full time female aged 25-29 with no kids. Interest.co.nz considers the affordability threshold for this group as 30%, although that doesn’t leave room for children.

Four of the 12 regions surveyed in the Home Loan Affordability report showed improvements in affordability, including Auckland, Taranaki, Canterbury and Central Otago. This was largely because house prices fell in these areas.

Eight the regions showed deteriorations, including Northland, Waikato, Hawkes Bay, Manawatu/Wangaui, Wellington, Nelson/Marlborough, Otago and Southland. House prices rose in these areas.

Southland continued to be the cheapest region in the nation with the typical home buyer having to pay 32% of take-home pay to afford the mortgage on a median house. The most expensive region was Central Otago Lakes region on 74.9%.

Note to editors: The Housing affordability series from interest.co.nz was first published in February 2007 and was sponsored by Fairfax Media up until May 2008. It was sponsored by Wizard Home Loans until December. Wizard Home Loans is now being wound up by its owner GE Money.

Home loan affordability for typical buyers

General/New Zealand Report:
http://www.interest.co.nz/HLA/HLA-NZ-March2009.asp

Links to individual reports for regions can be found here

Home loan affordability for first-home buyers

General/New Zealand Report:
http://www.interest.co.nz/HLA/FHB-NZ-March2009.asp

Links to individual reports for regions can be found here

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%.

ENDS

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