New Zealand home loan affordability improved in July by its biggest amount in 18 months to its best levels since September last year as fixed mortgage rates dropped and house prices eased, the Roost Home Loan Affordability report shows.

Affordability improved significantly in Queenstown, Waikato/Bay of Plenty, Hawkes Bay, Nelson, Wellington and Canterbury because house prices fell.

But affordability worsened slightly in Northland, Manawatu, Otago and Southland because house prices rose.

Auckland is now the least affordable area in New Zealand, taking that mantle from Queenstown for the first time since January 2002.

Affordability is set to improve further through the second half of 2010 if house prices keep falling in a "buyers market" and further concerns about the global economy drive market interest rates lower.

Personal tax cuts from October 1 are also set to further improve affordability.

The national median house price fell 1 per cent to NZ$349,000 in July from June and is now down 3.2 per cent from a record high of NZ$360,500 in March.

The average two year mortgage rate fell to 6.98 per cent in July from 7.18 per cent in June and has fallen further since the end of July to around 6.75 per cent.

Concerns about the growth outlook globally drove wholesale interest rates lower through July and early August.

Banks passed some of these declines on in the form of lower fixed mortgage rates, despite the Reserve Bank's increase in the Official Cash Rate to 3 per cent.

Variable mortgage rates have risen around 0.25 per cent to around 6.25 per cent in the last month.

The Roost Home Loan Affordability report measures the affordability nationally and regionally for income earners and households, taking into account house prices, interest rates and incomes.

"The combination of lower fixed mortgage rates and a buyers' market is improving affordability," said Roost spokeswoman Margaret Smith.

"Homebuyers are in a strong position in a market where house prices are flat to falling and the outlook for interest rates is more subdued," Smith said.

The Reserve Bank lifted the Official Cash Rate (OCR) as expected to 3 per cent on July 29, but also cautioned that the economic outlook had deteriorated and that future OCR hikes would be smaller and slower than it had previously forecast.

Wholesale interest rates have fallen around 40 basis points since then and financial markets are now expecting the OCR to rise just 50 basis points in the next year to around 3.5 per cent.

Most home owners are still on fixed mortgages, but more borrowers have chosen to float in the last year given floating rates at around 6.2 per cent are cheaper than longer term fixed rates at around 6.75 per cent.

However, the gap has closed over the last month, making the fixed vs floating decision more evenly balanced.

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 house improved to 59.5 per cent in July from 61.3 per cent in June and is closer to its 57.4 per cent level from July 2009.

This was the biggest improvement since January 2009 and takes affordability to its best level since September 2009.

Affordability hit its worst level of 83.4 per cent in March 2008 just after house prices peaked and 2 year mortgage rates were close to 10 per cent.

Many home buyers moved early in 2009 to take advantage of lower interest rates and look for bargains, which improved the number of houses sold and raised prices. But house sales volumes have weakened in recent months as tax changes in the May 20 budget and softer economy have affected sentiment and activity.

Affordability is difficult in the central areas of 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.

Affordability for the typical first-home-buyer also improved to 52 per cent in July from 53.8 per cent in June.

Meanwhile, affordability for households with more than one income improved to its best levels since September 2009.

This measure of a 'standard typical household' found the proportion of after tax income needed to service the mortgage on a median house fell to 39.9 per cent in July from 41.2 per cent in June.

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 survey's measure of a 'standard first-home-buyer household' found the proportion of after tax income needed to service the mortgage on a first quartile home fell to 25.1 per cent in July from 26.0 per cent in June.

This measure peaked at 35 per cent in June 2007.

This 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.