Those buying a house are still paying nearly half of their income in mortgage repayments, while those renting are paying about 22 per cent of their income for a home.

Most young people initially rent, able to afford better houses if they rent as a group, but when older many ignore the amount of income eaten up by mortgage payments and want to buy for security and stability if they have a family. It’s also a Kiwi thing.

While housing affordability has recently been improving as property values fall, incomes rise and interest rates stabilise, it is still testing for buyers, says Kelvin Davidson in CoreLogic’s latest Housing Affordability Report.

In the past 15 years, for example, it has been consistently been more expensive to pay a mortgage. Rent has been on average 17.5 per cent less than mortgage payments.

Davidson, CoreLogic’s senior property economist, says mortgage repayments are still eating up a large proportion of people’s income. Mortgage repayments as a percentage of gross annual average household income reduced from a peak of 53 per cent in in the fourth quarter last year to 49 per cent last quarter, but remain well above the long-term average of 38 per cent.

Each of the main centres still has mortgage repayments as a percentage of gross household income at least eight percentage points higher than their own long-term averages, with Tauranga the most stretched and Wellington the least.

“Even after the recent improvements, almost half of a household’s income being eaten up by interest repayments is relatively unaffordable compared to long-term averages. Although lower mortgage rates seem likely over a one- to two-year horizon, we’re not expecting any relief via rate cuts in the immediate to short-term,” Davidson says.

He says given the uneasy prospect that property values may start rising, albeit gradually, once again as has occurred in a couple regions, this will only add to the strain on new home buyers, at least until interest rates start to come back down.

However, he says rising incomes will only partially offset rising interest rates.

Rate drops not expected soon

Kiwibank chief economist Jarrod Kerr says last week’s message from the RBNZ’s OCR review is the door opening to another interest rate hike.

“It’s something we don’t need. The RBNZ wants the full force of recent tightening to hit households in coming months.  Thoughts of rate cuts were deliberately squashed, in order to keep wholesale rates, and therefore mortgage and other lending rates, high and dry. No pain, no gain.” And, Kerr says, the RBNZ wants to ensure it inflicts more pain.

Kiwibank’s call for a rate cut as early as February looks increasingly unlikely, although Kerr says the bank needs to take the RBNZ at its word here. “The central bank is saying, clearly enough, the time required to see inflation fall back comfortably towards 2%, will take a lot longer than our forecasts.” The bank has pushed the date out to May.  

Value to income ratio continues to improve

Properties across the country are now valued at 7.2 times the average household income, down from 7.8 six months ago.

Davidson says the figure has fallen in recent months as property values have dipped and incomes continued to rise amidst the strong labour market backdrop, but remains above the long-term average of 6.1.

The latest figure of 7.2 is significantly lower than the first quarter of 2022’s peak of 8.8 and is the lowest since 7.1 in the last quarter of 2020. “In other words, a lot of the strain that emerged post-COVID has been easing but remains elevated by longer-term historical levels.”

Tauranga remains the least affordable main centre, with a value to income ratio of 9.5 in the second quarter of this year, followed by Auckland, Dunedin, Hamilton, Christchurch and Wellington.

“After a period of stretched affordability, the sharp falls in Wellington City house prices lately have seen this part of the country get markedly better in terms of purchasing power and it retains the title of most affordable from Christchurch for the second consecutive report,” Davidson says.

Years to save a deposit reducing

The years to save a deposit measure fell to 9.6, still above the long-term average of 8.1, but two years better than the worst reading in the first quarter of 2022 at 11.7 years. Again, the latest figure is the lowest since the fourth quarter of 2020.

Tauranga has the longest period of time required to save a deposit of any of the main centres, at 12.6 years, well above its long-term average of 10.8 years, and the national figure of 9.6 years. However, it has started to improve, having peaked at 15.8 years in the first quarter of last year.

Rental affordability relatively unchanged

Davidson says rising incomes will have helped tenants in terms of rental affordability, but generally speaking, that has been offset by growth in rents themselves.

“At the national level, rents absorb 22 per cent of average household income, a touch above the average, but at least not much different from where it’s been for the past few years,” he says.

“The market that stands out is probably Christchurch, which has long been regarded as New Zealand’s most favourable main centre for housing affordability, both in terms of buying and renting, but this no longer applies to the same extent. Indeed, it’s now relatively more expensive to rent in Christchurch than Wellington, Auckland, and Hamilton.”