Housing affordability a long way off

The figure for the second quarter of this year is up sharply from the 7.4 times recorded just three months ago and 6.6 times of 12 months ago. The long-term average is for property values to be 5.8 times the average annual household income.

Property values rose 15% during the first six months of 2021, well ahead of the increase in gross average household income which rose just 1.0%, illustrating the country’s acute affordability challenges.

CoreLogic’s chief property economist Kelvin Davidson says since the last report in late February, the New Zealand economy and property market have generally remained buoyant.

“Even though mortgage rates have remained low, albeit they’re now starting to rise, housing affordability has simply become worse, and that’s from an already stretched position.

“Those higher mortgage rates themselves will exacerbate the situation in the coming months, but they should eventually aid affordability by dampening house prices.”

New regulations

Declining affordability has been a key reason for a raft of new regulatory changes introduced in 2021, which have largely centred on investors, who are now required to have a 40% deposit.

They are also facing a reduction in the ability to claim interest as a tax deductible expense. An extension of the bright-line test for additional property purchases was also introduced in March.

Davidson says these factors along with rising mortgage rates should contribute to a slowdown in property value growth. Added to this would be the current lockdowns having an impact on the economy and employment but this won’t occur in the short-term.

“In lieu of a big drop in employment or a global financial-style reduction in credit supply, it’ll still plausibly take at least five years for housing affordability to adjust back to some kind of normality, which won’t be much consolation for aspiring first home buyers,” he says.

The Reserve Bank recently estimated that an adjustment phase could take as many as eight years.

House deposits

The report also found it currently takes 10.6 years to save a house deposit, beating the previous first quarter high of 9.9 years. It takes almost three years longer to save for a house deposit than the long-term average of 7.8 years.

On average, households who take out a new home loan spend 38% of their income on their mortgage repayments, compared to tenants, whose rental payments absorb 21% of household income.

Despite historically low interest rates, average mortgage payments as a proportion of household income have increased from 32% a year ago.

“However, this is not to say that renting is easy either – that figure of 21% is also above average.

“It’s also worth noting that the typical income for a renting household may well be lower than the overall average, which would imply a much higher figure than 21% of their income being spent on accommodation costs,” Davidson says.

“Mortgage repayments are now back to levels last seen in early 2018, when typical fixed mortgage rates were much higher, above 5%.

“These patterns of declining housing affordability have been seen right across the country, from the main centres down to the smaller rural areas.

“Of 66 main authorities, 49 have a value to income ratio at its highest recorded level, going back to 2004.

“Looking at the mortgage affordability measure, 43 of 66 areas are currently above average, despite low interest rates.”

Least affordable areas

Tauranga and Auckland are New Zealand’s least affordable main centres, requiring 49% and 43% of gross household income respectively, to service an average mortgage with an 80% loan to value ratio.

Despite ultra-low mortgage rates in the past three to six months, Hamilton households require 38% of their income to make payments, the highest level since just prior to the global financial crisis in the second quarter of 2008.

Similarly mortgage holders in Wellington spend 36% of their income on mortgage repayments and Dunedin households spend 39%.

Christchurch’s figure is comparatively low, albeit rising, at 28%.

Affordability outlook

Davidson says it’s conceivable that house prices have further to rise before flattening out.

This could see affordability metrics decline further in the next three to six months, particularly with the added threat of continued interest rate rises – which will serve to push up mortgage repayments in the near term before they eventually help affordability by restraining house prices.

“However, towards the middle and later stages of next year slower house price growth should allow for some improvement in affordability, especially as rising incomes in a squeezed labour market should help those first home buyers trying to cobble together the deposit.

“That said, even with housing supply expanding, a return to ‘normal’ for most affordability measures looks likely to be a long grind.”