Hope for NZ home buyers as housing affordability reaches a “turning point”

Housing affordability across New Zealand has reached a “turning point” as falling house prices and growing wages start to benefit buyers.

CoreLogic’s Housing Affordability Report found the country’s housing affordability plunged to the worst levels on record last year, as property prices surged 41 per cent during the Covid era.

CoreLogic NZ Chief Property Economist Kelvin Davidson said the pattern of erosion of housing affordability had slipped into reverse in the past few months. 

“The turning point is here,” Mr Davidson said. 

“Affordability has started to improve on most measures since April, however it is not universal. 

“Higher mortgage rates still cause strain when you look at affordability in terms of debt servicing costs relative to household income.” 

The price of New Zealand homes compared to income levels reached a record of 8.9 in the first quarter of 2022 and has since dropped to 8.5. 

However, the level remains well above the pre-Covid rate of 6.6 and the long-term average value-to-income ratio of 6.

“This is at least a start and will provide some would-be first home buyers a little more confidence,” Mr Davidson said. 

“The small improvement in the value-to-income ratio is evident right across the country, main centres and the provinces alike.”

The time to save for a typical home deposit in New Zealand has also fallen from a record high of 11.8 years in Q1 2022, to 11.4 years in the second quarter. 

The figure remains higher than the long-term average of 8 years but signifies a change in direction as values drop and incomes rise, according to Mr Davidson.

“A similar message applies here to other measures in this report – affordability is still stretched but it has started to improve for property buyers,” he said. 

All main centres and urban areas have seen time-to-save figures easing from record highs in Q1 2022, with Tauranga still requiring the longest period of time to save a deposit, at 15.3 years, down from its peak of 15.9 years just three months earlier.

The amount of household income required to service a mortgage remains alarmingly high, with 53 per cent of gross household income required to service an 80 per cent LVR mortgage, up from 50 per cent just three months ago, Mr Davidson said.

“Compared to the long-run average of 37 per cent, the latest reading is still the most problematic area of affordability and surpasses the sustained 50 per cent peak we hit in 2007-08,” he said. 

“The falls in property values that we’ve seen in recent months will have helped the required debt servicing costs for households (given smaller mortgages), but this effect has been outweighed by the rise in mortgage rates themselves.”

In Auckland, Hamilton, Tauranga and Dunedin, mortgage repayments currently absorb at least 50 per cent of gross annual average household income, with Wellington’s figure of 47 per cent still a record high. 

Rental costs continue to absorb 22 per cent of gross average household income, a proportion that remains unchanged in 2022, after hitting a record high in Q1.

However, Mr Davidson said there may be respite on the way. 

“Landlords have held the balance of market pricing power for several months, pushing up rents fairly sharply,” he said. 

“However, there are now clearer signs that this process is also weakening, as more rental supply becomes available and demand softens a bit as New Zealander’s exit overseas for work and travel opportunities. 

“That should help to improve tenants’ affordability in the coming quarters.” 

Rental affordability has remained flat or improved slightly in Auckland, Hamilton, Tauranga and Wellington. 

However, Christchurch and Dunedin’s rental affordability deteriorated in Q2 2022.

Rent as a percentage of gross annual average household income remained above the long-term average in most main centres, meaning affordability for tenants is still stretched, especially as the typical tenant earns less than the average income.

Mr Davidson said housing affordability measures didn’t necessarily provide good guidance for future trends, however the latest measures suggested the worst had passed in this cycle.

“It may be a quarter or two yet before it becomes clear that rents and mortgage payments are starting to represent a smaller proportion relative to household income,” he said.

“Even so, it also needs to be acknowledged that affordability remains significantly stretched, and even a 10-15 per cent drop in property values from the peak will still leave many buyers under financial pressure.”

“Indeed, a continuation of low unemployment could limit the scale of house price falls, meaning any long-term improvement in affordability may need to come from sustained wage growth. 

“Of course, further moves over time to increase housing supply and the related infrastructure are still very important too.”

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Rowan Crosby

Rowan Crosby is a senior journalist at Elite Agent specialising in finance and real estate.