Loan ratios may trap borrowers

The other week I wrote about how tough it is for first home buyers in Auckland. One reader wrote to say that buying a home wasn't plain sailing in the 80s either. She says back then mortgage payers faced interest rates of 17 to 19 per cent, but despite this exceptionally high interest rate plenty of people were able to afford a mortgage.

While Auckland home prices are out of whack with the rest of the country, the big difference between then and now is that in the 80s one could borrow only around three times one's annual salary, which kept property prices in check. According to the Reserve Bank of New Zealand, a mortgage of three times annual income, or less, is a good ratio. Now, such restrictions are less widely adopted by lenders.

Today, the median house price to income multiple in Auckland central is 9.99. That means some buyers are borrowing 10 times their annual salary. Multiples on Auckland's North Shore are 9.36; go West, it's 7.65; and in South Auckland the ratio is 6.69.

The picture changes outside Auckland. House price to income multiples drop to 3.71 in Whangarei, 4.38 in Hamilton, 5.67 in Christchurch, and 4.75 in Wellington.

Of course, plenty of houses are sold in Auckland to cash buyers and investors, and perhaps it's that which has distorted the real estate market for young house hunters.

The latest AMP360 Home Loan Affordability report shows the difficulties first home buyers face in Auckland have occurred in just the last two years, and are almost entirely a result of house prices rising faster than incomes.

But are we approaching the peak of the Auckland market, repeating what happened in 2007? If nothing changes, there is no reason to think market trends will change -- or correct themselves unless there is a surprise for landlords in the next Budget, or a shock OCR rise on April 30 (highly unlikely).

If the RBNZ were to force an income to loan ratio on lenders, homeowners will have negative equity as house prices are forced down to meet what buyers can pay. That's not good for home owners or the banks.

If the RBNZ raises interest rates to cool the housing market the NZ dollar will go into orbit against other currencies and depress house prices outside the main centres.

If the rate is lowered to help the regions it will be like pouring petrol on Auckland's hot housing market. That's what happens when you have a two-speed economy. It's really anyone's guess what will happen next.

Auction results

Harcourts has released details of this week's auctions. Not all the sale prices were declared but, of the figures available, Auckland auction sale prices range from $500,000 to $2.66 million.

In Christchurch, the highest price achieved was $1.5 million and the lowest was $414,000. In Wellington, sale prices ranged from $47,000 to $450,000.

The AMP report says that in February 2013 the median net income of a first home-buying couple in Auckland was $1483 a week and by last month it was $1537.

Over the same period Auckland's lower quartile house price went from $429,000 to $554,600.