Home loan affordability improves

BNZ Home Loan Affordability report
For May 2009
for release midday June 18, 2009

Home loan affordability improves for first time in 2009

The BNZ Home Loan Affordability measure improved in May from April, which was the first monthly improvement in 2009.

A slight fall in the median house price and flat interest rates helped reduce the proportion of after-tax pay needed to service a mortgage on a median home to 55.9% in May from 56.4% in April. This is sharply better than the 80.6% seen a year ago and the record worst level of 83.4% in March last year, said Interest.co.nz, which produces the series of national and regional reports for BNZ.

Affordability improved in an unbroken run through 2008 as interest rates fell sharply and house prices fell. A rise in after-tax incomes because of wage inflation and a tax cut helped extend the trend. But that run of improvement ended in February, March and April this year as house prices stopped falling and interest rates began to bottom out.

“Home loan affordability has improved dramatically in the last year and home buyers will welcome this slight improvement again after a few months of stagnation,” said BNZ General Manager of Strategy and Marketing Blair Vernon.

“But home buyers can’t take further improvement for granted. House prices and interest rates would have to fall again for affordability to get better,” Vernon said. “The housing market has been more stable in recent months and longer term mortgage rates have been rising,” he said.

The indefinite delay of tax cuts planned for 2010 and 2011 puts all the weight on interest rates and house prices as sources for further improvement.

The REINZ median house price fell to NZ$337,500 in May from NZ$340,000 in April, while the average 2 year mortgage rate was flat at 6.23%. These two factors reduced the proportion of a single median income needed to service an 80% mortgage on a median priced house to 55.9% in May from 56.4% in April. This was first improvement in any one month in 2009, but it remains off its best levels in 5 years of around 54% in January and February.

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 and April to take advantage of lower interest rates and look for bargains, which improved the number of houses sold and stabilised 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.

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.

Affordability also improved for a typical first home buyer. The Housing Affordability report’s measure shows the mortgage servicing proportion improved to 44.1% in May from 44.8% in April. 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 fell to 36.6% in May from 36.9% the previous month. 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 improved to 22.8% in May from 23.2% in April. It has, however, improved from 34% 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.

Southland continued to be the cheapest region in the nation with the typical home buyer having to pay 32.6% of take-home pay to afford the mortgage on a median house. The most expensive region was the Central Otago Lakes region on 76.3%, although this is down from 115.4% a year ago.

Note to editors: The Housing affordability series from interest.co.nz was sponsored by Wizard Home Loans until December. The series is now sponsored by BNZ.
Home loan affordability for typical buyers

General/New Zealand Report:

http://www.interest.co.nz/HLA/HLA-NZ-June2009.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-June2009.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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