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Low rates mean first home buyer affordability best since late 2004

Wednesday 20th July 2011

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Continued low interest rates and slight increases in after tax income helped improve first buyer affordability in June to its best levels since late 2004, Roost Home Loan Affordability report shows.

The prices of cheaper homes remained flat, helping affordability for younger double income households in most parts of the country.

Central Auckland affordability remains difficult as prices remain firm, but record low interest rates continue to keep affordability at its best levels in 7 years in most other parts of the country. Invercargill is the most affordable city in the country, while Queenstown is the least affordable.

Floating mortgage rates are at multi-decade lows, although home buyers are increasingly viewing the prospect of higher interest rates later year as the Reserve Bank tries to contain inflation in a recovering economy. Some banks continue to offer rate and fee discounts to try to boost weak loan growth .

"Banks are competing hard for first home buyers and investors alike," said Rhonda Maxwell, spokeswoman for mortgage broking group Roost Home Loans.

Banks are offering loan to value ratios of up to 90 and 95% and are discounting establishment and legal fees in competitive situations, Maxwell said.

"Home loan affordability ratios are the best we've seen in seven years, but the interest rate outlook is beginning to change," Maxwell said. "Now is the time home buyers can get the most out of advice from a mortgage broker," she said .

Stronger than expected growth and inflation figures in the last week have prompted economists to bring forward their forecasts for the Reserve Bank's first cash rate hike to October or December from January.

A young couple earning the median wage could afford to buy a first quartile priced house in June, with 21.0% of their disposable income required to service an 80% mortgage. This is down from 21.1% in May and down from a June 2007 high of 35.1%. It is at its best levels since November 2004.

The national median house price rose to NZ$360,000 in June from NZ$350,000 in May and is just off a record high of NZ$365,000 in March. The first quartile house price edged up to NZ$249,000 from NZ$248,750 in May.

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

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% mortgage on a median income was 52.6% in June from 51.3% in May. The worst level of affordability was 83.4% seen at the peak of the house price boom in March 2008 when 2 year mortgage rates were close to 10%.

Affordability has been improving since December 2009 as house prices have flattened out and interest rates have fallen, the monthly measure calculated by in association with Roost shows.

More than 50% of home owners are now on floating mortgages and most new borrowers are choosing to float, given floating rates at around 5.75% are cheaper than average longer term fixed rates at around 6.2%. The Home Loan Affordability reports are use the floating rate.

Affordability is difficult in 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, particularly those bidding for homes priced in the lower quartile.

Affordability for households with more than one income deteriorated slightly because higher incomes were outweighed by the effects of a small rise in median house prices. This measure of a ‘standard typical household' found the proportion of after tax income needed to service the mortgage on a median house was 34.6% at the end of June from 34.6% in May and a record high of 54% in November 2007.

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% is considered unaffordable for a household, whereas any level closer to 30% 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 21.0% in June from 21.1% in May and a record high of 34.9% in November 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% is considered unaffordable in the longer term for such a household, while any level closer to 20% is seen as attractive and coinciding with strong demand.

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