Home loan affordability Feb 2012: near worst in two years

Roost Home Loan Affordability report

For February 2012 – For immediate release

Home loan affordability worsens in February and near worst in two years

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Home loan affordability worsened in February to near its worst levels in two years after the national median house price surged to near a record high.

A slight fall in some interest rates and a marginal rise in incomes was not enough to offset the rise in house prices.

New Zealand’s median house price rose to NZ$382,000 in February from NZ$370,000 in January and was just below a record high of NZ$389,000 set in December.

A surge in house prices in Auckland and Christchurch over the last year because of a shortage of supply is now beginning to leach out into those provincial areas where economic activity is stronger and emigration is slower. A relaxation of lending standards and more heated competition between banks to lend at record low interest rates has also helped boost housing market activity.

Nationally, affordability worsened by 1.6 percentage points in February from January, which meant it took 54.9% of a single median income after tax to afford an 80% mortgage on a median house in February, according to the Roost home loan affordability report released today.

“Market activity heated up again through the long hot summer. First home buyers and investors have been busy working with their brokers to get the best deal out of the intense competition between the banks,” said Colleen Dennehy, a spokeswoman for Roost, which sponsors the Home Loan Affordability report series from Interest.co.nz.

Affordability worsened in most of Auckland, Northland, Wellington, Rotorua and Porirua because of big rises in median house prices. Affordability only improved in South Auckland and Wanganui where median house prices fell.

Average advertised floating mortgage rates were flat in February, while advertised six month and 1 year mortgage rates have fallen over the last year and were down slightly in February.

For first home buyers – which in this Roost index are defined as a 25-29 year old who buys a first quartile home – there was also a deterioration, particularly in the biggest cities. However, apart from Auckland, Queenstown and Canterbury, it takes around 20-40% of after tax pay to afford an 80% mortgage on a lower quartile priced house. That percentage rises however to 66%, 67% and 47% respectively in those three most expensive areas.

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

For working households, the situation is similar although bringing two incomes to the job of paying for a mortgage makes life considerably easier. A household with two incomes would typically have had to use 36.2% of their after tax pay in February to service the mortgage on a median priced house. This is up from 35.1% the previous month.

On this basis, most New Zealand cities have a household affordability index below 40% for couples in the 30-34 age group. This household is assumed to have one 5 year old child.

For households in the 25-29 age group (which is assumed to have no children), affordability also improved, with 22.3% of after tax income in households with two incomes required to service the debt, up from 21.8% the previous month.

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.

First home buyer household affordability is measured by calculating the proportion of after tax pay needed by two young median income earners to service an 80% home loan on a first quartile priced house.

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Roost Home loan affordability for typical buyers

General/New Zealand Report: http://www.interest.co.nz/property/home-loan-affordability

Links to individual reports for regions can be found here

Roost Home loan affordability for first-home buyers

General/New Zealand Report:

http://www.interest.co.nz/first-home-buyer

Links to individual reports for regions can be found here

ENDS

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%.

About Roost

Roost is the sponsor of this Report, and the Reports must be referred to as the Roost home loan affordability reports. Roost, owned by AMP, is one of New Zealand’s largest independent home loan and investment property mortgage brokers with 16 franchisees nationwide. Roost offers to source the perfect loan for its customers from a panel of lenders and insurance advice from Roost insurance specialists. Roost was established in 1996. For more information please visit www.roost.co.nz

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