Interest rate pain: Higher incomes needed to buy cheaper houses

Falling house prices aren't all they're cracked up to be for aspiring homeowners. Photo / Fiona Goodall

House prices may be falling, but higher interest rates mean the amount of income needed to buy a house is rising.

The average annual income of a first-home buyer (or a pair or group of first-home buyers) who took out a mortgage in June was $142,000, according to data collected by the Reserve Bank.

This was nearly $7000 more than the average in November 2021, when the median house price was 8 per cent higher, according to the Real Estate Institute of New Zealand.

Similarly, the average income of an owner-occupier (without investment property) who took out a mortgage in June was $182,000 - around $15,000 more than the average in November.

CoreLogic head of research Nick Goodall put the lift in incomes required to buy houses mostly down to rising interest rates.

The average fixed two-year mortgage rate doubled to 5.2 per cent between November and June, according to interest.co.nz.

The monthly repayments of someone with a $400,000 mortgage (with a 30-year term) would've been $595 higher, at $2,196, if they were charged the average fixed two-year rate in June versus in November.

Because higher interest rates mean it's more expensive to service a mortgage, banks are requiring borrowers to have higher incomes relative to the amount of debt they're seeking.

Of all the new mortgage lending banks did in June, exactly half went to borrowers seeking debt worth more than five times their annual incomes. This portion was down from 60 per cent in November.

Reserve Bank data shows banks have been reining in their lending to borrowers seeking a lot of debt compared to their incomes fairly consistently across borrower types.

In June, 47 per cent of new mortgage lending to first-home buyers went to borrowers seeking debt worth more than five times their incomes.

This portion sat at 41 per cent for owner-occupiers without investment property, 66 per cent for owner-occupiers with investment property, and 62 per cent for investors.

Goodall noted there are also other factors tightening credit conditions, beyond higher interest rates.

Changes to the Credit Contracts and Consumer Finance Act, which took effect in December (and were watered down a little last month), require lenders to be more judicious to ensure borrowers don't take on more debt than they can handle.

Goodall noted banks will also be wary the Reserve Bank is working to have a framework for debt-to-income ratio restrictions in place this year, so restrictions can be introduced by mid-2023 if required.

If used, these restrictions would limit banks' lending to borrowers seeking debt worth a certain amount more than their incomes.

Goodall said that in an environment where interest rates are rising and house prices are falling, risk aversion by banks may also extend to borrowers.