Press Release – AMP360
First home buyers should have no trouble getting a house anywhere but Auckland: AMP360 Home Loan Affordability report
Housing remains affordable for first home buyers in all parts of the country except Auckland, according to the latest AMP360 Home Loan Affordability Report.
The report measures the ability of a working couple aged 25-29 (based on the median income for that age group) to service a mortgage for a home at the lower quartile selling price in each region of the country.
Traditionally, financial advisers have considered housing to be affordable when the cost of rent or servicing a mortgage takes up no more than a third of take home pay.
However with the more liberal attitudes to debt currently prevailing, the AMP360 report uses a 40% of net income threshold to determine whether a home loan would be affordable or not.
The report shows that at a national level, housing remains well within affordable levels for first home buyers.
The median after tax income of a working couple aged 25-29 is $1500 a week, while the national lower quartile selling price for homes sold in February (based on REINZ figures) was $292,000.
The cost of servicing a mortgage (at the average 2 year fixed rate) to buy a property at that price would be $357 a week, or 23.8% of the couple’s weekly take home pay.
With mortgage repayments taking up less than a quarter of a working couple’s take home pay, buying a first home remains well within affordable levels on a New Zealand-wide basis.
And as long as they are disciplined with their saving habit, a working couple should also be able to get together a deposit of more than 20% to buy a lower quartile priced home.
The AMP360 report assumes a couple have saved 20% of their net income over four years and have earned interest at the prevailing 90 day deposit rate during that time, to get their deposit.
On that basis, a working 25-29 year old couple earning the median income for their age group would have saved $65,596 over four years, which would give them a 22.5% deposit for a lower quartile priced house.
So at the national level, housing remains affordable for first home buyers, both in terms of saving for a deposit and comfortably making the repayments on the mortgage for a lower quartile priced home.
The Auckland problem child
But there are significant regional differences in affordability.
The AMP360 report makes adjustments for regional differences in both dwelling selling prices and income levels.
When these regional differences are taken into account, all regions of the country remain below the affordable threshold except Auckland.
The most affordable region in the country for first home buyers is Wanganui, where the mortgage repayments would take just 8.6% of income.
And other cities such as Tauranga (26.8%), Hamilton (24%), New Plymouth (26.8%), Napier (23.3%), Wellington (30,1%), Nelson (26.4%), Christchurch (30.9%), Dunedin (21%) and Invercargill (11.3%) all remain well below the 40% of net income affordability threshold.
However Queenstown, where the mortgage payments on a lower quartile priced home would be 39.3% of the median take home pay, only just scrapes in below the 40% affordability threshold, and is the most expensive place for first home buyers outside of Auckland.
Not surprisingly Auckland is the problem child in the first home market.
The lower quartile house price in the Auckland region was $554,600 in February, and the median take home pay for a 25-29 year old couple would be $1537 a week.
The mortgage payments required to purchase a lower quartile-priced home would be $733 a week, eating up 47.7% of their take home pay.
That would leave them with $804 a week between them to pay for everything else.
Paying that much of your income to cover your accommodation costs is a concern for two main reasons.
Firstly, mortgage payments are only one of the costs that home owners face and when other costs such as rates, insurance and maintenance are factored in, our first home buyers would be likely to be paying out well over half of their take home pay to cover their housing costs.
It also leaves them vulnerable to any financial shocks, such as an increase in mortgage interest rates (the interest rate used in the latest AMP 360 calculation is 5.6%, which by historical standards is unusually low) or to either of the couple facing a reduction in their income.
If any of those things happened, the first home buying couple could find themselves in serious financial difficulties.
Another problem first home buyers face in Auckland is that they would find it difficult to save a 20% deposit.
A 20% deposit on a lower quartile-priced home in Auckland would be $110,920.
But if the first home buyers saved 20% of their net income for four years, with interest, (the AMP360 report’s standard calculation) they would only have $67,532 for a deposit, which is just 12.2% of the cost of a lower quartile-priced house.
So to buy that home they would need a mortgage for 87.8% of the purchase price, meaning they would have to try to secure a mortgage from the limited number that banks make available for borrowers wanting a mortgage with a loan-to-value ratio above 80%.
It would also mean they would not qualify for many of the special mortgage deals banks offer from time to time, which are usually reserved for customers with a minimum 20% deposit.
The latest AMP360 Home Loan Affordability report also shows that the difficulties first home buyers face in Auckland have occurred just over the last two years and are almost entirely a result of house prices rising much faster than incomes.
In February 2013 the median net income of a first home buying couple in Auckland was $1483 a week and by last month that had increased to $1537 a week, up $54 (3.6%).
Over the same period Auckland’s lower quartile house price went from $429,000 to $554,600 an increase of $125,3000 (29.2%), while the average mortgage interest rate used in the calculations went from 5.49% to 5.6%.
The result is that weekly mortgage payments climbed from $548 in February 2013 to $733 last month, easily outpacing the growth in income over that period and taking the amount of take home pay required to service the mortgage from 36.9% (still affordable) to 47.7% (unaffordable).
AMP360 national manager Paul Gardiner said buying your first home was one of life’s major events, so it was important that first home buyers made the right choice when it came to their mortgage.
“It’s important that there’s a good fit between the borrower and their mortgage and our mortgage advisers can explain the options first home buyers have available to them and help them choose the mortgage that best suits their needs,” he said.
AMP360 Home loan affordability for typical buyers
General/New Zealand Report: http://www.interest.co.nz/property/home-loan-affordability
Links to individual reports for regions can be found here
AMP360 Home loan affordability for first-home buyers
Question and Answers about the Report
These Reports are prepared solely by the interest.co.nz analyst team. AMP360 sponsors this work.
How does interest.co.nz work out these numbers?
Interest.co.nz gathers data from Statistics New Zealand and IRD on wages in each region, data from the Real Estate Institute from each region each month, and data from banks and non-banks on interest rates. It has calculated home loan affordability going back to the beginning of 2002.
How is this survey different from the Massey University survey of affordability?
The Massey study is only done quarterly rather than monthly and uses an index of Home affordability rather than actually measuring home loan affordability. It uses an index rather than the actual measure of the proportion of after tax pay needed to service an 80% mortgage on a median home. The exact composition and meaning of the index is not detailed.
Why is home loan affordability important?
It is a useful way to work out if a housing market is overvalued. It is clear house prices stopped rising when the national affordability ratio rose above 80% or 2 median incomes to service the average home loan. It’s a way of comparing affordability of housing markets with a national average and comparing housing values from one year to the next. For example, the affordability ratio in 2002 before the housing boom really took off was around 41%.
AMP360 is the sponsor of these Reports, and the Reports must be referred to as the AMP360 home loan affordability reports.