BNZ Home Loan Affordability report
For November 2009
for immediate release
NZ home loan affordability unchanged in November; Auckland worsens
New Zealand home loan affordability was unchanged in November after house prices were steady nationally and a slight increase in income was offset by slightly higher interest rates, the BNZ Home Loan Affordability measure shows.
However, affordability worsened in Auckland and Northland through November because of a jump in house prices and affordability for first home buyers also worsened because of a rise in lower priced houses. Auckland is fast catching Queenstown again as the least affordable region in New Zealand as prices rise in the harbour city while prices fall in the alpine resort.
Affordability remains at its worst levels nationally since November last year and has degraded faster in late 2009 than at any time since the peak of the housing boom in early 2007, the monthly measure calculated by Interest.co.nz found.
The BNZ 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 house rose by 3.2 percentage point to 61.8%.
The median house price as measured by REINZ was flat in November at a record NZ$355,000 and has now risen 11% from its January 2009 trough of NZ$325,000. The average 2 year fixed mortgage rate, which has been among the most popular with borrowers in recent years, rose 6 basis points to 7.13% over the month and has now risen from an average 5.92% in February.
Variable mortgage rates, meanwhile, have fallen in the last month on average to 6.00% from 6.07% in October and are now at their lowest level in at least 7 years, meaning some borrowers may have chosen to go variable rather than fixed to improve their immediate affordability.
Meanwhile, median incomes rose 0.6% in the last month, albeit under pressure from a flat employment market, less overtime and lower bonuses.
"The recent growth in house prices appears to have run out of steam as the worsening affordability situation and rising interest rates causes buyers and bankers to think twice,” Interest.co.nz Editor Bernard Hickey said.
"The outlook for higher interest rates next year has taken some of the heat out of the worsening affordability situation, but only while house prices are stable or falling,” Hickey said.
"The growing debate around tax reform ahead of the 2010 budget may also be making property investors more uncertain, given the possibility of a land tax or a ‘Risk Free Return Method’ tax on equity in rental property, as suggested by the Tax Working Group.”
Affordability hit its worst level of 83.4% in March 2008 just after house prices peaked and 2 year mortgage rates were close to 10%.
Many home buyers jumped in March, April and May of this year to take advantage of lower interest rates and look for bargains, which improved the number of houses sold and boosted prices. But short term mortgage interest rates flattened out in late March and longer term mortgage rates began to rise in line with rises on wholesale markets and higher local term deposit rates.
House sales volumes have flattened off in the last three months as first home buyers and rental investors stayed away, leaving most of the activity at the top end for owner-occupiers using equity stored up during the 2002-07 boom or trading down to reduce debt.
Affordability is now often out of reach for most home buyers on a single income. 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.
Affordability for the typical first-home-buyer deteriorated in November. The proportion of a single after tax pay needed to buy a first quartile house rose to 54.4% from 52.8% in October. This is the highest level since November 2008. The first quartile house price rose in November to NZ$257,000 from NZ$250,000 in October. 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.
Meanwhile, affordability for households with more than one income was flat at levels seen at the end of 2008.
This measure of a ‘standard typical household' found the proportion of after tax income needed to service the mortgage on a median house was flat at 40.6% in November. 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.
This remains at the worst level of standard household affordability since November last year and significantly above the 35% trough seen in January, February and March when buyer demand returned to the housing market. Any level over 40% is considered unaffordable for a household.
Our 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 rose to 25.8% in November from 25.0% in October and is up from a trough of 22% in February and March when some first-home-buyers returned to the market. This measure peaked at 35% in June 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.
Southland remains the most affordable region for home buyers with a standard affordability measure of 34.5%, while the Central Otago Lakes (Wanaka and Queenstown) is the least affordable on 82.8%, although it is being quickly caught by Auckland on 76.8%, up from 74.4% the previous month. Central Otago affordability has improved from a peak of 137.6% in July last year as apartment prices have crashed in the wake of the collapse of several finance companies.
Wellington’s affordability improved to 63.1% from at 66.8% as house prices fell and Christchurch affordability was unchanged at 55.7%.