New Zealand home loan affordability worsened slightly in June from May as the median house price nudged up faster than incomes, according to the latest "Roost Home Loan Affordability" report.

However, affordability is set to improve through July as average two year mortgage rates have dropped slightly and house prices are expected to be flat or falling.

The national median house price rose 0.7 per cent to NZ$352,500 in June from May, but remains down 2.2 per cent from a record high of NZ$360,500 in March.

This drove a slight deterioration in home loan affordability given the average 2 year mortgage rate was flat at 7.19 per cent.

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

Affordability improved significantly in Auckland, Northland and Queenstown as house prices dropped, but worsened in Christchurch where prices rose.

Affordability was best in Southland, Otago and Manawatu/Wanganui, while the Central Otago Lakes region continues to be the least affordable.

Affordability is better than its worst levels hit in early 2007 near the peak of the housing boom and interest rates, but has broadly deteriorated in the last 12 months as house prices rebounded in the wake of interest rate cuts in late 2008 and early 2009, the monthly measure - calculated by in association with Roost found.

However, the national deterioration is not expected to extend into July as fixed mortgage rates have dropped and house prices are subdued.

"Fixed mortgage rates fell early in July after a fall in wholesale rates, which will improve the affordability equation for home buyers who choose to fix rather than float," said Roost spokeswoman Margaret Smith.

"But the key for affordability in coming months will be house prices and whether the Reserve Bank continues to increase the Official Cash Rate," Smith said.

The Reserve Bank lifted the Official Cash Rate to 2.75 per cent from 2.5 per cent on June 10 and economists expect it to increase it again to 3 per cent on July 29.

Banks passed on the hike in the form of higher floating mortgage rates in late June, but in early July they cut longer term fixed mortgage rates by 0.25 per cent to 0.75 per cent in line with lower wholesale rates as markets worried about a double-dip recession in the global economy.

Most home owners are still on fixed mortgages, but an increasing number are choosing to float given floating rates at just under 6 per cent are still cheaper than longer term fixed rates at around 7 per cent.

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 rose to 61.8 per cent from 61.4 per cent in May and remains above its 56.1 per cent level from June 2009.

The average 2 year fixed mortgage rate, which has been among the most popular with borrowers in recent years, was flat at 7.19% in June. But since the end of June the average two year fixed rate has dropped to 6.98 per cent, suggesting an improvement in affordability to come if house prices are flat or falling.

Average variable mortgage rates rose to 6.02 per cent in June from 5.86 per cent in May. Variable rates are expected to rise to well over 6 per cent by the end of 2010 as the Reserve Bank increases the Official Cash Rate.

Affordability hit its worst level of 83.4 per cent in March 2008 just after house prices peaked and 2 year mortgage rates were close to 10 per cent.

Many home buyers jumped in March, April and May of 2009 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 2009 and longer term mortgage rates have bounced from their early 2009 lows.

House sales volumes flattened off in the last three months of 2009 and early 2010 as first home buyers and rental investors stayed away. The OCR hike in June and the May 20 budget moves to remove depreciation as a taxable expense for property investors has seen house sales drop a further 20 per cent during May and June.

Affordability is now 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.