Prospective home buyers' position is even more precarious in higher-priced regions
The economic changes that have swept over New Zealand over the last three years, including the recent monetary policies, have been disastrous for aspiring first-home buyers, reports have suggested.
Interest.co.nz’s Home Loan Affordability Reports, which have been tracking the main measures of housing affordability for first-home buyers on a month-by-month basis since 2004, showed that first-home buyers are worse off now than they were three years ago.
The reports found that the chances of first-home buyers purchasing their own home in September 2022 were substantially lower than they were in September 2019, with mortgage interest rates one of the biggest drivers of that change, interest.co.nz reported.
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While not the only driver of the property market, interest rates are one of the most important because most property transactions are highly leveraged. Interest rate changes, whether up or down, have an almost immediate impact on borrowing levels and prices.
In September 2019, major banks were charging an average two-year fixed mortgage rate of 3.5%. That rate hit a record low of 2.52% in May 2021, after the Reserve Bank pushed down interest rates. From there, interest rates have risen steeply, pushing the average two-year fixed rate to 5.47% in September this year. And it's likely to be onwards and upwards from there.
So, how did that impact house prices?
According to the Home Loan Affordability Report, which tracks the Real Estate Institute of New Zealand’s lower-quartile selling price, the national lower-quartile price in September 2019 was $420,000, but due to falling mortgage rates that fed a wave of irrational exuberance over the housing market, it peaked to $670,000 in November 2021.
While the recent successive rising interest rates have dragged the lower-quartile price back down to $611,000 in September this year, it was still up by $191,000 (+45%) compared to three years ago, interest.co.nz reported.
That means that in September 2019, a prospective buyer would have been required to put together $42,000 for a 10% deposit for a home purchased at the lower-quartile price. And by September 2022, that had risen to $61,100.
A 20% deposit on the same property would have required $84,000 in September 2019 and $122,200 in September 2022.
That also means the amount of mortgage debt the buyer would have needed to secure to complete the deal would have increased from $378,000 in September 2019 to $549,000 in September 2022 for a 10% deposit or from $336,000 to $488,800 for a 20% deposit.
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That plus the higher interest rates increased the amount of money buyers would need to allocate each week for the corresponding mortgage payments – from $452 to $816 (+80.5%) for a 10% deposit, or from $348 to $638 (+83.3%) for a 20% deposit, interest.co.nz reported.
The Home Loan Affordability Report, which tracks the estimated, combined, median after-tax pay for couples aged 25-29, if both are working full time, also found that such a couple would have been taking home $1,685 a week in September 2019. That figure would have lifted by 8.7% to $1,832 a week by September 2022.
That pales by comparison though to the additional $364 a week they would need to allocate for mortgage payments if they had a 10% deposit, or the additional $290 a week they would need to set aside if they had a 20% deposit.
Another way to look at those figures was that mortgage payments on a lower-quartile home bought with a 10% deposit would have eaten up 26.8% of the take-home pay of a typical first-home buying couple in September 2019, with that figure rising to 44.5% by September 2022.
If they had a 20% deposit, mortgage payments as a percentage of income would have risen from 20.7% to 34.8% over the same period.
So, however you look at the numbers, first-home buyers now are considerably worse off compared to three years ago.
What was more worrying than the national figures was the position of first-home buyers in higher priced regions such as Auckland, Waikato, Bay of Plenty, Wellington, and Nelson/Marlborough.
In Auckland, for instance, the mortgage payments on a lower-quartile home bought with a 10% deposit ($82,000) would eat up 58.9% of the median take home pay for 25-29 year olds, making buying a home not just difficult but also beyond the reach of people on average wages, interest.co.nz reported.
