Home loan affordability improves to best levels in 7 years

Home loan affordability improved in February and early March to its best levels in 7 years as flat to falling house prices in most areas and a large reduction in floating mortgage rates after the February 22 earthquake boosted home buyers’ purchasing power, the Roost Home Loan Affordability report shows.

The ongoing benefits of last year’s income tax cuts for those on higher incomes boosted affordability to its best levels since March 2004, which was just before house prices surged. The Reserve Bank’s 0.5% cut in the Official Cash Rate has been passed on quickly to new floating mortgage borrowers.

However, there are renewed signs of a two-speed housing market where prices of more expensive homes in Auckland are firmer than entry level and investment properties in the outer suburbs and in provincial cities, where prices are weaker and buyers are in a stronger position.

“The interest rate cuts this month have significantly improved the outlook for home buyers,” said Rhonda Maxwell, spokeswoman for mortgage broking group Roost Home Loans.

“Affordability for young couples is now at levels not seen since the middle of last decade, which is encouraging many to look at buying their first homes ,” Maxwell said.

A young couple earning the median wage can afford to buy a first quartile priced house with 21.6% of their disposable income required to service an 80% mortgage. This is down from 21.9% in December and down from a June 2007 high of 35.1%.

The national median house price rose to NZ$350,000 in February from NZ$340,000 in January, but the first quartile house price was flat at NZ$245,000. Prices outside of central Auckland and Wellington are flat to falling.

The Roost Home Loan Affordability report measures affordability nationally and regionally for individual income earners and households, taking into account median house prices, interest rates and incomes.

The Roost 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 to 51.7% in early March after the Reserve Bank rate cut, improving from 54% at the end of February and 52.7% at the end of January.

Affordability improved in central Auckland, Hamilton, Rotorua and Kapiti Coast because of lower house prices, but worsened somewhat in West Auckland and South Auckland due to higher prices. Queenstown reclaimed the mantle as the most expensive city in the country after a rise in its median house price. Wanganui took the top spot as the most affordable city from Invercargill.

Affordability has been improving since December 2009 as house prices have flattened out and interest rates have fallen, the monthly measure calculated by interest.co.nz in association with Roost found.

Most home owners are still on fixed mortgages, but more new borrowers are choosing to float, given floating rates at around 5.75% are cheaper than average longer term fixed rates at around 6.2%. The Home Loan Affordability reports are now using the floating rate as most new mortgages are now floating rather than fixed. Home loan 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%.

Affordability is difficult in Auckland, Wellington, Christchurch, Hamilton and Tauranga for those on a single median income, but homebuyers in smaller provincial cities will find home ownership much more affordable. Households with two incomes are also in a stronger position, particularly those bidding for homes priced in the lower quartile.

Affordability for households with more than one income improved in January because of the fall in the median house price. This measure of a ‘standard typical household' found the proportion of after tax income needed to service the mortgage on a median house was to 35.4% at the end of February from 35.7% in December.

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 benefits. Any level over 40% is considered unaffordable for a household, whereas any level closer to 30% has coincided with increased buyer demand in the past.

The survey’s 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 fell to 21.6% in February from 21.9% in December.
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, while any level closer to 20% is seen as attractive and coinciding with strong demand.

ENDS

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