Record low rates drive home affordability

Home loan affordability is near its best levels since early 2004 because of record low interest rates.
Photo / Herald on Sunday
Home loan affordability is near its best levels since early 2004 because of record low interest rates. Photo / Herald on Sunday

The Reserve Bank's lowering of its interest rate forecasts has improved the outlook for home loan affordability through late 2011 and into 2012 as house prices remain stable in most cities and incomes edge higher.

The Roost Home Loan Affordability report for August shows a slight deterioration in August from July because the national median house price nudged higher, but affordability is near its best levels since early 2004 because of record low interest rates.

Massey University's home affordability report, also released today, shows cautious buyers and low rates of new construction have left the housing market subdued.

Massey's report says home affordability improved slightly during the last quarter, but was slowing.

Professor Bob Hargreaves from the university's school of economics and finance said a growth and wages and low mortgage interest rates had offset a slight increase in the media house price.

Last week the Reserve Bank forecast short term interest rates would rise around 1.5 percentage points over the next year, which is lower than its previous forecast for a rise of about 2 percentage points.

The bank said slower global growth, a delayed Christchurch rebuild and the dampening effect of a high New Zealand dollar were factors lowering the interest rate outlook.

Economists also pushed back their forecasts for an Official Cash Rate hike to around March 2012 from December, and some suggested those borrowers thinking of fixing should think again about floating.

Rhonda Maxwell, spokeswoman for mortgage broking group Roost Home Loans, said the change in the interest rate outlook improved the outlook for home loan affordability too,.

"It changes the equation for home buyers over the next year or two and may prompt potential home buyers to re-do their calculations," Maxwell said.

"Banks remain keen to lend and often offer deals through mortgage brokers that can further improve those equations," she said.

Affordability improved in central Auckland, North Shore, Central Wellington, Hutt Valley and West Auckland in August because of a fall in median house prices, the Roost Home Loan Affordability report shows.

Higher house prices saw affordability worsen somewhat in South Auckland, Porirua and Central Otago Lakes region, the Roost report shows.

Wanganui remains the most affordable city in the country, while Queenstown is the least affordable for those on a median income. See the main report for links to regional reports.

A young couple earning the median wage could afford to buy a first quartile priced house in August, with 20.7 per cent of their disposable income required to service an 80 per cent mortgage.

This is up from 20.6 per cent in July, down from 24.7 per cent in August a year ago and down from a June 2007 high of 35.1 per cent.

The national median house price rose to $355,000 from $345,000 in July and is below a record high of $365,000 in March. The first quartile house price was flat at $245,000 in August.

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 per cent mortgage on a median was 51.5 per cent in August from 50.2 per cent in July.

The worst level of affordability was 83.4 per cent seen at the peak of the house price boom in March 2008 when 2 year mortgage rates were close to 10 per cent.

Affordability has generally been improving since December 2009 as house prices have flattened out and interest rates have fallen.

More than 50 per cent of home owners are now on floating mortgages and most new borrowers are choosing to float, given advertised floating rates at around 5.75 per cent are cheaper than average longer term fixed rates at around 6.2 per cent.

The Home Loan Affordability reports use the floating rate.

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 worsened slightly in August because of the rise in median house prices.

This measure of a 'standard typical household' found the proportion of after tax income needed to service the mortgage on a median house was 34.0 per cent at the end of August, up from 33.1 per cent in July, but down from a record high of 54 per cent in November 2007.

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 per cent is considered unaffordable for a household, whereas any level closer to 30 per cent 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 rose to 20.7 per cent in August, up from 20.6 per cent in July but below a record high of 34.9 per cent in November 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 per cent is considered unaffordable in the longer term for such a household, while any level closer to 20 per cent is seen as attractive and coinciding with strong demand.

- INTEREST.CO.NZ / NZ Herald Online

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