Home loan affordability deteriorates in October

BNZ Home Loan Affordability report   
For October 2009
for immediate release

 
Home loan affordability deteriorates in October to worst in a year
 

Home loan affordability deteriorated sharply in October after house prices rose to record levels and fixed mortgage interest rates rose to their highest levels this year, the BNZ Home Loan Affordability measure shows.

Affordability is now at its worst levels since November last year and has degraded faster in the last six months 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 61.9%. This was the biggest deterioration in one month since March 2007, which was at the height of the boom that doubled house prices between 2002 and 2007.

The median house price as measured by REINZ rose 1.4% in October to a record NZ$355,000 from NZ$350,000 in September 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 49 basis points to 7.07% over the month and has now risen from an average 5.92% in February.

Variable mortgage rates have fallen in the last month on average to 6.07% from 6.08%, meaning some borrowers may have chosen to go variable rather than fixed to improve their immediate affordability. Meanwhile, median incomes rose 0.7% in the last month, albeit under pressure from a flat employment market, less overtime and lower bonuses.

"The last time New Zealand saw such a rapid deterioration in affordability was in 2007 before the market ran out of steam and started declining through 2008,” Interest.co.nz Editor Bernard Hickey said.

"Mortgage rates are continuing to rise as banks try to recover lost profit margins and they pay for higher deposit rates because of intense competition in the market," Hickey said.
"Interest rates are widely expected to rise further next year while unemployment is rising over 6% in the wake of the recession. This combined pressure of higher interest rates and modest income growth will keep a lid on house prices through the summer and into next year, particularly given bank lending growth is well below 5%.”

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 two 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.

Affordability is increasingly 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 also deteriorated in October. The proportion of a single after tax pay needed to buy a first quartile house rose to 52.8% from 50.8% in September. This is the highest level since November 2008.  The first quartile house price was flat in October at NZ$250,000 with most of the house price action happening near the top of the market.

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 also deteriorated and are now back to 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 rose to 40.6% in October from 38.5% in September. 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 is 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% in October from 24% in August. This compares with the trough of 22% in January, 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 34.4%, while the Central Otago Lakes (Wanaka and Queenstown) is the least affordable on 90.9%. Auckland sits at 74.5%, Wellington at 67.1% and Christchurch at 55.9%.

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