Fairfax Media home loan affordability reports

Media release by www.interest.co.nz

Embargoed until 1 pm Tuesday, 18 December 2007

for November 2007

This series reports on changing home loan affordability for typical buyers and first-home buyers in New Zealand as a national market, and separately for 12 regions. Current real estate prices, mortgage rates and incomes are the three key determinants of home loan affordability.

Links to the .pdf reports for New Zealand and the 12 regions are on the website www.interest.co.nz

National home loan affordability worst ever.

(A home loan is considered “affordable” when mortgage payments cost 40% or less of take-home pay.)

An unfortunate combination of record high house prices, and recent high interest rates, have pushed the cost of a home loan for a median priced house purchased in November up to 83.4% of the median take-home pay.

It will now take almost 2.1 median incomes in a household to afford the mortgage for a median priced house. Nationally, that means an after-tax household income of $1,396 per week. This is up from 1.8 incomes just one year ago. Five years ago, only 1.1 median incomes were required.

Not only are home loans becoming less affordable, they are doing so at a faster rate, and excluding more and more families from the benefits of home ownership.

House prices have actually changed little over the past five months. But they are at levels where stability does very little for affordability. And, interest rates continue to rise, with the very real prospect that they will continue that rise into the new year.

There are different impacts regionally. Affordability improved in four regions, but got worse in eight regions. The “least unaffordable“ regions are Manawatu/Wanganui in the North Island, and Southland in the South Island. The “most unaffordable” regions remain Auckland in the North Island, and the Central Otago Lakes in the South Island.

In Auckland 99% of take-home pay from one median income is now required to be able to afford the mortgage on a median priced house purchased in October. In Wellington it is now 86.9%. Southland, even though it is the least unaffordable region, has shot up to 54.7% of one median income following sharp rises in house prices there in November.

The affordability crisis has built up over the past five or so years. But it will likely take at least twice as long to remedy – if action is taken. Without action, it could become an embedded social problem.

Home loan affordability for first home buyers

The situation is not much better for first-home buyers. Our index tracks the cost of a home loan for buyers aged 24 to 29 who buy a first-quartile priced house, with a deposit equivalent to four years savings.

Nationally, they need 60.9% of the median income for their age-group to afford the mortgage. This effectively means 1.5 household incomes are required. These are also records.

First home buyers face not only affordability issues, but are challenged by regular buyers who seek first-quartile-priced homes in response to their own affordability problems.

The unavailability of affordable first homes is a serious issue, cause almost solely by the unintended consequences of public policy decisions. We have been under-building this type of housing on our urban fringes for years. The core cost that makes fringe housing unaffordable is the land value, and this is kept high by deliberate limits on supply. New Zealand benchmarks very poorly internationally on the availability of affordable first homes, and unfortunately current public policy is sure to make things even worse.

Home loan affordability for typical buyers

General/New Zealand Report: