Next 6-9 Months of Economic Performance Pivotal for Mortgage Holders, Buyers and Renters
From a housing affordability perspective, New Zealand has entered the current recession on a more stable footing than the previous economic shock of the GFC, according to the inaugural New Zealand Housing Affordability Report from CoreLogic. The report finds that while there has not been a major shift in housing affordability based on the suite of measures CoreLogic has compiled, the further falls in interest rates in Q2 did help mortgage payments to drop slightly as a percentage of household income.
Nationally, the figure for mortgage payments as a percentage of average (gross) household income is now 32%, down from 33% in Q1 2020 and also the lowest figure since Q2 2013 (31%). It is significantly lower than it was just before the GFC, when it peaked at 49% in 2007. The current figure is comparatively lower to Australia where it sits at 34% versus the 2004-20 average of almost 40%. Paying a mortgage is easier in New Zealand (long term average of 36%), but both countries are sitting below their own averages.
Senior Property Economist Kelvin Davidson says, “Generally speaking we can see that affordability has improved/stabilised in recent years, and there were always going to be lots of moving parts for what might have happened in Q2. In the end, house prices were flattish, incomes held up, while mortgage rates fell as a result of steadily declining wholesale interest rates.
“However, it must be acknowledged that the national house price to income ratio is still high – 6.4 versus the 2004-20 average of 5.6 – and it takes an average of more than 8.5 years to save the deposit for a house. Historically, the average time to save a deposit has been a year less, at 7.5. For renters, the market isn’t noticeably less affordable than in the past – average rents currently absorb 20% of household income, bang in line with historical norms.”
The New Zealand Housing Affordability Report provides a comprehensive, overall view of housing affordability, because it uses household income on a timely, quarterly basis, not individual incomes multiplied by two, or time series figures that are well out of date. It also has a long history for analysis (dating back to 2004) and covers granular information for every territorial authority in New Zealand. It uses average property values across all stock, not a median price for whatever happens to have sold at the time.
Mr Davidson says the report comes at a pivotal time. “While housing affordability hasn’t materially changed in the past few months, the latest Level 2 and 3 restrictions in August and the influence of those – and other factors – on how the economy performs over the next six to nine months will be crucial.
“On one hand, any further falls in mortgage rates and/or drops in house prices would cause affordability to improve. On the other hand, there is potential for falls in household income as unemployment rises, and/or hours worked drop, and wages potentially feel some strain. This would push in the other direction, making housing less affordable. Given that rents have a tendency to flatten off rather than fall materially, any pressure on household income would also reduce the affordability of a property for tenants.
“Overall, it’s important to note that affordability analysis can rarely be based on absolute comparisons – it has to be an area’s figures measured relative to its own history or to other parts of the country. Housing affordability measures provide reliable indications of what is currently going on but not necessarily good guidance about what happens next – particularly in the volatile and unpredictable economic environment New Zealand is facing at present.”
What’s going on regionally
All in all, no part of the country is likely to be completely immune to the economic slowdown and labour market pressures that New Zealanders are currently facing. But different positions for housing affordability at least make some regional property markets potentially a little less (or more) vulnerable than others.
Around the main centres, there have been improvements lately in housing affordability in Auckland and Christchurch; in the latter city, at 25%, mortgage payments relative to average household income are currently at an historical low – or in other words, affordability is better for buyers than it has been for some time. Hamilton too has been relatively stable. By contrast, Wellington has got less affordable, while there has been an even stronger adverse shift in Dunedin. Tauranga remains the least affordable of the main centres, based on CoreLogic’s suite of measures.
In the other main urban areas, strong growth in property values in the past few years has generally seen affordability worsen (for example) in Gisborne, Napier, Whanganui, Palmerston North, and Nelson. Queenstown’s slowdown has helped affordability to stabilise recently.
In ‘provincial’ markets, affordability is better than elsewhere (because low house prices more than offset lower incomes), and examples here include many central/lower North Island areas, such as South Waikato, Rangitikei, and Tararua.
- Prior to COVID-19, housing affordability in New Zealand had broadly improved in the previous two to three years as average household incomes continued to rise (reflecting lower unemployment, higher labour force participation rates – especially amongst those aged 65+ – and a higher average number of workers per household) and mortgage rates continued to reduce.
- However, some measures of housing affordability – e.g. the value to income ratio and years required to save a deposit – have recently begun to deteriorate again.
- The CoreLogic Housing Affordability Report includes detailed reporting on:
- Change in mortgage servicing (% of income) over the past year;
- National overview of value to income ratio, share of income required for mortgage repayments, years to save a deposit, and rent to income ratio;
- Regional overview of value to income ratio, share of income required for mortgage repayments, years to save a deposit, and rent to income ratio;
- Analysis of housing affordability for Auckland, Hamilton, Tauranga, Wellington, Christchurch and Dunedin, and for other main urban areas including Whangarei, Rotorua, Hastings, Napier, Whanganui, New Plymouth, Palmerston North, Kapiti Coast, Nelson, Queenstown and Invercargill.
- The four measures of housing affordability included in CoreLogic Housing Affordability Report are:
- The ratio of average property values to average gross annual household income
- The share of household income required to service an 80% loan to value (LVR) mortgage
- The number of years it takes to save a 20% deposit, assuming 15% of income is saved
- The proportion of household income required to pay the rent