New Zealand’s housing affordability is slowly showing signs of improvement, on the back of falling house prices and a gradual increase in incomes, according to CoreLogic’s bi-annual Housing Affordability Report.
The country’s housing affordability reached the worst levels on record last year, declining abruptly following a 41% surge in the average property value during the COVID era.
However, 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,” he 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.”
Value to income ratio drops from record high
The value to income ratio reached a record of 8.9 in Q1 2022 and has since dropped to 8.5 in Q2. However, the level remains well above the pre-COVID rate of 6.6 and long-term average value to income ratio of 6.0.
“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.”
Time to save a deposit falling
The measure of years to save a typical deposit has also eased from a record high of 11.8 in Q1 2022, to 11.4 years in the second quarter. Again, the figure remains more than the long-term average of 8.0 but signifies a change in direction as values drop and incomes rise,” Mr Davidson observed.
“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.
High proportion of household income required for mortgage serviceability
The amount of household income required to service a mortgage remains alarmingly high. Currently 53% of gross household income is required to service an 80% LVR mortgage (based on the average property value, with the mortgage over a 25-year term), up from 50% just three months ago – driven higher by the rise in mortgage rates.
“Compared to the long-run average of 37%, the latest reading is still the most problematic area of affordability and surpasses the sustained 50% peak we hit in 2007-08,” Mr Davidson 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% of gross annual average household income, with Wellington’s figure of 47% a record high.
Households still struggling with rental affordability
Rental costs continue to absorb 22% 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,” Mr Davidson 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 Zealanders 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.
Rents as a percentage of gross annual average household income remain above long-term average in most main centres, meaning that affordability for tenants is still stretched and possibly even more so, to the extent that typically renting households earn less than the average income.
Improving affordability outlook
Mr Davidson warned housing affordability measures didn’t necessarily provide good guidance for future trends however the latest measures suggested the worst had passed in this cycle for housing affordability.
“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. Even so, it also needs to be acknowledged that affordability remains significantly stretched, and even a 10-15% drop in property values from the peak will still leave many buyers under financial pressure,” he said.
“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.”
Download the Housing Affordability Report
CoreLogic New Zealand