Higher incomes help boost housing affordability

On one hand, rising interest rates make debt costlier to service. On the other - or others - house prices are falling, and incomes are rising. Photo / Fiona Goodall Photography

Houses may be getting slightly more affordable, despite the cost of servicing debt shooting up.

Analysis from BNZ chief economist Mike Jones suggests that since hitting peak unaffordability in the December 2021 quarter, houses are becoming a little more affordable.

On the one hand, rising interest rates mean it’s more expensive to service debt. But on the other, house prices are falling, and incomes are rising.

Jones maintains income growth is proving to be a “significant offset” to higher debt servicing costs.

He drew this conclusion by adding the cost of making a 20 per cent deposit on a median-priced home to the cost of servicing a mortgage on a two-year fixed interest rate and dividing this by the average household disposable income.

“It’s back of the envelope stuff designed to get at ‘the average’ prospective home buyer,” Jones disclaimed.

“The reality is that all situations will be different. But it at least gives us an idea about the rough direction and magnitude of the net of three variables noted above.”

The index produced using this formula peaked at 1.92 in the December 2021 quarter (low affordability), before improving to 1.72 in the September 2022 quarter.

In the September 2019 quarter – before the housing boom that accompanied the Reserve Bank’s slashing of interest rates – the index sat at 1.41.

While this reading reflects better affordability than at present, houses were still deemed unaffordable at the time.

“Based on our projections, affordability, as proxied by the index, will have improved back to pre-Covid levels by around the end of 2023,” Jones said.

“This compares to our house price forecast which, if correct (a big ‘if’), would put house prices still 10 to 15 per cent above pre-Covid levels by [the] end [of] 2023.

“Again, this is testament to solid household income growth.”

Bank lending data the Reserve Bank collected shows those who haven’t had pay rises will find it increasingly difficult to get a mortgage.

As the Herald reported last month, the level of income required to get a mortgage is still rising.

The average first-home buyer (or pair/group of first-home buyers) who took out in a mortgage in September had an annual gross income of $146,000. This was $4000 more than in June.

Meanwhile, the average other owner-occupier (without investment property) had an income of $184,000 – $3000 more than in June.

Rising interest rates also meant prospective borrowers had to work harder to convince their banks they could service their debt.

Accordingly, the portion of new mortgage lending that went to people seeking a lot of debt, worth more than five times their annual incomes, fell for the 10th consecutive month in September.

Nearly 45 per cent of new mortgage lending in the month went to borrowers with debt worth more than five times their incomes.

This was a fall from 50 per cent in June, and a drop from the recent high of 60 per cent in November 2021 when house prices peaked.