Housing affordability continues to rapidly decline in New Zealand

Record house price growth across New Zealand (NZ) has led to rapidly declining affordability, with almost no signs of easing, despite rising mortgage rates. 

The average property value across New Zealand is 7.9 times the average annual household income, which represents a record high in 18-year history of CoreLogic NZ‘s Housing Affordability report.

This figure is up sharply from the 7.4 times recorded just three months ago and 6.6 times of 12 months ago.

The long-term average is for property values to be 5.8 times the average annual household income, according to CoreLogic NZ Chief Property Economist Kelvin Davidson.

Property values in Aotearoa rose 15 per cent during the first six months of 2021, well ahead of the increase in gross average household income which rose 1 per cent, illustrating the acute affordability challenges we face.

“Since our last Housing Affordability Report in late February, the New Zealand economy and property market have generally remained very buoyant,” Mr Davidson said.

“Even though mortgage rates have remained very low, albeit they’re now starting to rise, housing affordability has simply become worse, and that’s from an already stretched position.

“Those higher mortgage rates themselves will exacerbate the situation in the coming months, albeit they should eventually aid affordability by dampening house prices.”

Declining affordability has been a key reason for a raft of new regulatory changes introduced in 2021, which have largely centred around investors.

Source: CoreLogic NZ

These buyers are now required to have a 40 per cent deposit and have seen a reduction in the ability to claim interest as a tax deductible expense.

An extension of the Brightline Test for additional property purchases was also introduced in March.

Mr Davidson said while these factors along with rising mortgage rates should contribute to a slowdown in property value growth, especially if the current lockdowns have an impact on the economy and employment, it won’t occur in the short-term.

“In lieu of a big drop in employment or a GFC-style reduction in credit supply, it’ll still plausibly take at least five years for housing affordability to adjust back to some kind of normality, which won’t be much consolation for aspiring first home buyers,” he said.

The NZ Reserve Bank recently estimated that an adjustment phase could take as many as eight years.

The report also found it currently takes more than a decade to save a house deposit (10.6 years), beating the previous record high of 9.9 years, which was set in Q1 2021.

It takes almost three years longer to save for a house deposit than the long-term average of 7.8 years.

On average, households who take out a new home loan spend 38 per cent of their income on their mortgage repayments, compared to tenants, whose rental payments absorb 21 per cent of household income.

Despite historically low interest rates, average mortgage payments as a proportion of household income in NZ has increased from 32 per cent a year ago. 

“However, this is not to say that renting is easy either – indeed, that figure of 21 per cent is also above average,” Mr Davidson said.

“It’s also worth noting that the typical income for a renting household may well be lower than the overall average, which would imply a much higher figure than 21 per cent of their income being spent on accommodation costs.”

“Mortgage repayments are now back to levels not seen since early 2018, when typical fixed mortgage rates were much higher, above 5 per cent.

“These patterns of declining housing affordability have been seen right across the country, from the main centres down to the smaller rural areas.

“Of 66 main authorities, 49 currently have a value to income ratio at its highest recorded level, going back to 2004. Looking at the mortgage affordability measure, 43 of 66 areas are currently above average, despite low interest rates.”

New Zealand’s least affordable areas

The report noted there is a significantly higher demand to live close to the major city centres, where infrastructure, amenities and work opportunities are superior.

Tauranga and Auckland are New Zealand’s least affordable main centres, requiring 49 per cent and 43 per cent of gross household income respectively, to service an average mortgage with an 80 per cent loan to value ratio.

Over the past five years, average property values in Auckland have risen by 32 per cent, a touch more than the increase in average gross household income (29 per cent). 

For the past decade, and of course over the shorter timeframe since COVID-19 first hit NZ, Hamilton’s property prices have been growing ahead of incomes, with affordability steadily worsening.

Despite ultra-low mortgage rates in the past three to six months, Hamilton households require 38 per cent of their income to make payments, the highest level since just prior to the GFC in Q2 2008. Years to save a deposit has also spiked higher from 5.6 to 10.5.

The decline in housing affordability in Wellington City in the past five years has been amongst the most acute in the country. Mortgage holders in Wellington spend 36 per cent of their income on mortgage repayments.

Similarly, Dunedin households spend 39 per cent. Christchurch’s figure is comparatively low, but rising, at 28 per cent.

Source: CoreLogic NZ

Affordability outlook

Mr Davidson said it’s conceivable that house prices have further to rise before flattening out, which could see affordability metrics decline further in the next three to six months, particularly with the added threat of continued interest rate rises.

These interest rate rises will subsequently serve to push up mortgage repayments in the near term before they eventually help affordability by restraining house prices.

“However, towards the middle and later stages of 2022 slower house price growth should allow for some improvement in affordability, especially as rising incomes in a squeezed labour market should help those first home buyers trying to cobble together the deposit,” Mr Davidson said.

“That said, even with housing supply expanding, a return to ‘normal’ for most affordability measures looks likely to be a long grind.”

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