Home loan affordability - May 2007

Media release by www.interest.co.nz

20 June 2007 – embargoed until 3:00 pm

Home loan affordability - May 2007

This monthly series is designed to measure how much of average weekly take-home pay is required to make a standard mortgage repayment for an average house.

As at the end of May 2007, the national average was 79.3%, up marginally from April 2007 (79.2%), but up much more dramatically from April 2006 (66.8%).

That is, it now takes at least 79.3% of the average take-home pay to afford a standard mortgage payment of a median-priced house, as at May 2007.

In May 2002, five years ago, it took only 46.3% of take-home pay to make a mortgage payment on a median house. The index methodology is detailed below.

The drivers of the May 2007 increase were …
- median house prices rising +0.3% since April 2007, +14.8% since May 2006,
- benchmark interest rates crept up marginally from 8.784% in April 2007 and 7.879% in May 2006 to 8.794% in May 2007 as wholesale money cost pressures abated,

while take-home weekly pay estimates rose from $670.25 in April 2007 and $643.31 in May 2006 to $671.65 in May 2007.

Weekly take-home pay rose +$28.34 in the past twelve months, while weekly mortgage payments for a median-priced house has risen a whopping +$103.01. (This compares buying a median-priced house with average take-home pay between May 2006 and May 2007.)

There were no OCR increases in May. And, wholesale money costs rises were muted as these markets absorbed the April rises and international markets shifted sideways.

This index is designed to be a benchmark. Home buyers on average incomes may well choose to purchase a house below the median price level, and that will make their transaction more affordable. This survey does not yet have access to lower-quartile house price data.

But the changes in prices and interest rates reported here will be very similar no matter what band the home buyer is in. Home loans are getting less affordable for most people because house prices and interest rates are rising faster than take-home pay.

Full reports for each region are available online and include:

- Northland (154kb .pdf)
- Auckland (154kb .pdf)
- Waikato and Bay of Plenty (153kb .pdf)
- Hawkes Bay and Gisborne (154kb .pdf)
- Taranaki (154kb .pdf)
- Manawatu and Wanganui (153kb .pdf)
- Wellington (154kb .pdf)
- Nelson and Marlborough (154kb .pdf)
- Canterbury (153kb .pdf)
- Central Otago Lakes (153kb .pdf)
- Otago (154kb .pdf)
- Southland (154kb .pdf)

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But what happened in June?

One of the features of this survey is that it able to predict the impact of subsequent events.

On June 7, 2007 the Reserve Bank surprised many with yet another OCR rise of +0.25%, the third consecutive increase in their review cycle.

Although many analysts were surprised - and certainly many viewing New Zealand from the financial centers of the world were - it was not exactly a surprise to the economists of three of the four main banks here, each of whom predicted it correctly.

One consequence of these predictions has been the speed with which the New Zealand banks have implemented the rise into their floating mortgage rates - that happened within a day or so of the announcement.

And there was also a rapid reaction by the wholesale money markets - their 'surprise' translated into a rise in the risk premium applied to their lending to New Zealand. Those same international markets have seen rising bond yields, with the benchmark US Treasury 10 year bond reaching over 5.25% The flow-on effect of all this has also increased the costs for New Zealand funding of fixed rate mortgages.

This means that in the first two weeks of June, interest rates for fixed-rate mortgages have risen sharply. The two year fixed rate is now 9.25% at many banks, and averages 9.18% when the discounters are included.

Higher mortgage rates will impact affordability, and if June house prices remain unchanged, May's index of 79.3% will convert to at least 81.9% in June - that is, it will take 81.9% of one average take-home pay to afford the mortgage payments of a median priced house.

This would be the worst affordability has ever been, and there is no real sign the situation is about to be reversed.

Even if house prices stay unchanged, it would then take an incredible 16 years of current take-home pay increases to bring this index back to the point where 40% of one average income could afford a mediam priced house - (and that in turn assumes tax-rates will be indexed, something the politicians have been very reluctant to do).

We seem stuck with an affordability crisis for a very long time unless major public policy changes are made.

Urgent actions attacking housing supply inhibitors and new-build rates are required.

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Sources / Definitions / Methodology:

Average gross weekly earnings are sourced from Statistics New Zealand’s quarterly series. For the latest months a factor is applied to estimate the most recent periods, and this makes the outcome for those months provisional. (The impact of this process on the overall affordability measures is considered very low.)

Average mortgage interest rates are sourced from www.interest.co.nz. These averages are for banks only, because banks have 90%+ of the mortgage market. Affordability calculations are done for mortgages using floating, and the five fixed-rate terms. For the purpose of the data in this Report, the two-year fixed mortgage interest rate is used. This is, and has been the most popular term. However, the market is shifting to longer term rates, and the index reviews allow for keeping track of affordability issues as this shift happens.

The tax adjustments to average gross weekly earnings are per the PAYE tables issued by the IRD. This converts gross earnings to take-home pay.

Median house prices are as reported by the Real Estate Institute of New Zealand. We are using the REINZ series because it is more timely. We have run a detailed correlation with the QV series, and while the REINZ series may be seen to be more volatile in the short run, and the ‘median’ definition theoretically problematic, in fact the two series track very similarly, with the REINZ series giving an earlier indication of market trends.

Average gross weekly earnings are a national measure only. However, Statistics New Zealand also publish regional earnings data annually, by regional council areas, and this data is used to modify the national data into regional equivalents.

Average savings interest rates are sourced from www.interest.co.nz. These averages are for banks only, and use the one-year term deposit rate. This interest is credited to the time needed to save for the deposit, after deducting the IRD’s resident withholding tax for interest at the gross income level of the saver.

The home loan is assumed to be for 80% of the median house price, with the remaining 20% as part of the time-to-save deposit index.

The home loan is assumed to be a standard table mortgage, where both interest and principal is repaid in a level standard weekly payment. The repayment is calculated using the tools at www.interest.co.nz/calculator. Interest in arrears is assumed.

The affordability index in this Report is calculated by dividing the weekly mortgage payment for a median house price into the weekly take-home pay. An index is generated for each region, and nationally, and for each of the mortgage interest rate terms.

Disclaimer

IMPORTANT – PLEASE READ

No reader should rely on the contents of this report for making a specific investment or purchase decision. The information in this report is supplied strictly on the basis that only overall market trends are being reported on, and that all data, conclusions and opinions expressed are provisional and subject to revision. If you are making a specific investment or purchase decision, you are strongly advised to seek independent advice from a qualified professional you trust. The conditions and disclaimers set out at www.interest.co.nz/legaldisclaimer.asp are applicable to this report as well.

This report is made available on these terms only, and JDJL Limited or www.interest.co.nz is not responsible for any actions taken on the basis of information in this report, nor for any error in or omission from this report.

ENDS

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