Jeremy Tauri: The reality of having a mortgage

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When it comes to house prices, what is affordable depends a lot on interest rates.

$500,000 might be okay for an average-wage couple if interest rates are 5 per cent but quickly becomes unmanageable when rates creep up to more like 8 per cent or -- as we saw just a few years ago -- near 10 per cent.

But when councils and the Government say they're building "affordable" homes and crow about the number of young families they'll be housing, they always focus on a dollar figure.

I was pleased, then, to see a report out of Auckland Council address this issue.

The report, with the rather unappealing title Auckland's Housing Market: Spatial Trends in Dwelling Prices and Affordability for First Home Buyers, was prepared by the Economic Research Investigations and Monitoring Unit at Auckland Council.

It found that some types of housing had become more affordable since the global financial crisis, even as house prices rose -- because interest rates came down so sharply.

In 2007, only 20 per cent of Auckland's three-bedroom homes were sold at "affordable" prices. Ninety per cent of one-bedroom homes were affordable. Drops in interest rates since then had pushed 40 per cent of three-bedroom sales into the affordable category and 60 per cent of two-bedroom.

The authors said that meant councils and government needed to conduct sensitivity testing when they were using a housing cost-to-income ratio measure to determine affordability to work out how much that affordability could be affected by short-term changes in interest rates.

Efforts to make housing more affordable to first-time buyers should be encouraged. But there is no point selling lots of houses at $500,000 or $600,000 to families who will then struggle a lot when interest rates creep higher.

Some will argue that incomes will probably rise at the same time interest rates start their climb in earnest but mortgage repayments do have the tendency to escalate faster than pay cheques. And those home buyers also need to be able to retain a buffer so that if one of them is out of work for a while, their "affordable" home doesn't become an unmanageable financial burden.