Home loan affordability worsened nationally in October because of a rise in median house prices, but an improving outlook for lower interest rates is boosting turnover and borrower demand.

The Roost Home Loan Affordability report for October showed a slight deterioration from September, largely due to a rise in the median house price to $359,000 from $350,000.

Floating mortgage rates were steady and fixed mortgage rates edged lower, moving in line with financial market expectations for a fall in the Official Cash Rate over the next year. Last month economists and markets had expected the next move to be a rise in the rate from midway through next year.

The growing fear of a financial crisis in Europe and the outlook for slowing growth globally has dampened expectations for interest rate increases.

"Home buyers are heartened by the more solid outlook for low interest rates," said Rhonda Maxwell, spokeswoman for mortgage broking company Roost.


"Banks remain very competitive and the potential for further falls in fixed and floating mortgage rates is strengthening the appetites of home buyers," she said.

Affordability deteriorated nationally, with higher prices in North Shore, West Auckland, South Auckland, Wellington and Christchurch affecting affordability, although it remains near its best levels in 7 years overall, the Roost Home Loan Affordability report shows.

Affordability improved in Central Auckland because of a slight fall in the median price. 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 October, with 21.6 per cent of their disposable income required to service an 80 per cent mortgage.

This is up from 20.6 per cent in September and just above its best levels since August 2004.

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 in their regions and cities.

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 52 per cent in October from 51.8 per cent in September.

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.

Low interest rates the key


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 improved in September because of the fall 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 rose to 34.4 per cent from 33.5 per cent 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 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 first home buyer household 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.