A new report by Moody’s Investors Service has found that Auckland’s affordability improved in 2016 – thanks to low income rates and a rise in incomes.
But the proportion of income needed to meet mortgage repayments remains high and considerably more than in other regions.
Moody’s associate analyst Karen Burkhardt said Auckland’s high housing prices mean new home owners spend on average nearly half (46.5%) of their monthly income on mortgage repayments.
Poor housing affordability increases the risk of mortgage delinquencies and defaults.
“Auckland accounts for almost half (49.5%) of the loans in New Zealand cover pools,” she said.
“As such, we view the city’s poor housing affordability as credit negative for New Zealand covered bonds backed by mortgages on Auckland properties.”
However, the risks posed by poor housing affordability are mitigated by the current low weighted average LVRs on residential mortgage loans in New Zealand cover pools.
The report noted that the Reserve Bank has imposed limits on the proportion of mortgages with high LVRs that banks can write since 2013.
“This reduces the exposures of banks and covered bond programmes to higher-risk lending and provide a buffer in the event of declining house prices.”
When it came to the rest of New Zealand, the report found housing affordability improved in Canterbury, Gisborne/Hawkes Bay, Manawatu-Wanganui, Northland, Southland and Waikato/Bay of Plenty in 2016.
This was due to a combination of rising household incomes and lower mortgage interest rates.
However, housing affordability deteriorated in the Otago, Wellington, Taranaki and Nelson/Marlborough regions over the year.
This was because of rapid housing price increases and either declines or relatively small increases in household incomes.
As part of the report, Moody’s also ran a sensitivity analysis to gauge the impact of changes in house prices, interest rates and LVRs on housing affordability in New Zealand.
The analysis showed that Auckland is the most sensitive of any region in New Zealand to any shift in these factors.
For example, if mortgage interest rates were to rise to the 10-year average of 6.5%, the percentage of household income needed to meet mortgage repayments would increase by 8.2 percentage points in Auckland.
This is as compared to 5.5 percentage points on average across New Zealand.
While mortgage rates remain low by historical standards, they have been rising in recent months and commentators have been warning this could have a significant impact on some home owners.
The Moody’s data highlights the additional mortgage pressure that Auckland households could end up dealing with if mortgages rates continue to track upwards.
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