Monday , January 18 2021

Mortgage payments are just as affordable for first-time home buyers as they were three years ago, thanks to lower interest rates and higher wages

By Greg Ninness

The latest house price figures make surprising reading for potential first home buyers.

According to the New Zealand Institute of Real Estate, the lower quartile national home price was $ 520,000 in October.

That means it has increased by $ 40,000 (+ 19.5%) since October last year, and by $ 157,000 (+ 43.3%) since October 2017.

That’s an average increase of $ 1000 a week over the past three years for homes at the most affordable end of the market (the lower quartile price is the price point where 75% of sales are over and 25% below).

In Auckland, where prices are the most expensive in the country, the lower quartile price has risen from $ 654,000 in October 2017 to $ 769,000 in October this year.

That’s an increase of $ 31,500 over the past 12 months and $ 115,000 over the past three years.

That means a 10% deposit for a home at a national low quartile price will increase from $ 36,300 in October 2017 to $ 52,000 in October 2020. The amount of mortgage required to go along will increase from $ 326,700 to $ 468,000 over the same period.

The 20% deposit on the same property will increase $ 72,600 to $ 104,000 over the same three years, while the accompanying mortgage size will increase from $ 290,400 to $ 416,000.

That’s a pretty sharp increase, especially when you consider what has happened to wages over the same period.

If you took the national median rates for couples (male and female) across New Zealand aged 25-29, and assumed they were working full-time, that would give them a combined after-tax payment of $ 1,713 a week in October this year. .

That’s an increase of $ 34.14 a week (+ 2.0%) compared to October last year, and an increase of $ 129.91 a week (+ 8.2%) compared to October 2017.

Thus, over the past three years, the cost of homes in the parts of the market that may be most attractive to first home buyers has increased by 43.3%, while take-home payments for first-home buyers at the average rate of payment have increased. increased only 8.2%

That suggests that the lower quartile home prices have risen more than five times the after-tax wage rate for first home buyers over the past three years. But in order to get a complete picture of the pressures facing first-home buyers, we also need to look at what happened to mortgage rates over the same period. As of October 2017, the average two-year fixed mortgage rate offered by major banks was 4.70%. It fell almost continuously from there to 2.65% in October this year.

That drop had a big impact on mortgage payments.

If you had purchased a home for the October 2017 national low quartile price of $ 363,000 with a 10% deposit, which would require a mortgage of $ 326,700, the mortgage payments would cost about $ 446.71 a week, or more than 28% of the spouse’s take home. who bought the first house.

If the same property had been purchased with a 20% deposit, requiring a $ 290,400 mortgage, the payout would be about $ 347.19 a week, or just under 22% of a typical first home buyer’s take home payment.

At the lower quartile price of October 2020, the required mortgage with a 10% deposit would increase to $ 468,000, which would push up the mortgage by $ 43.93 a week even after allowing for a rate cut.

However, the after-tax payments of the typical first home buyer will also increase by about $ 142 a week over the same period, more than just making up for the increase in mortgage payments.

Measuring the mortgage payment as a percentage of the after-tax payment in the example above, shows that the figure has remained very stable at around 28% over the past three years for buyers with a 10% deposit, and 22% for buyers with 20%. deposit.

As far as mortgage affordability is concerned, there has been almost no change over the past three years, with lower interest rates to some extent canceling out the effect of rising prices on mortgage payments.

The higher price makes it more difficult to combine deposits

Where the price increase will make it difficult for first home buyers to collect security deposits.

The rise in the national lower quartile price since October 2017 has pushed the 10% deposit up from $ 36,300 to $ 52,000, and the amount required for the 20% deposit from $ 72,600 to $ 104,000.

If a couple with the average wage rates outlined above were able to save 20% of their after-tax payment each week to deposit, it would take them 2.8 years to earn enough money for the 10% deposit on a home in the lower quartile of national prices. (up from 2.1 years three years ago). A 20% deposit will take 5.8 years to deposit (up from 4.2 years three years ago).

So looking at the overall picture, mortgage payments have generally gotten easier for the typical first home buyer over the last three years, but raising deposits will be even more difficult.

This is especially true in Auckland, where the lower quartile prices are significantly higher than in other parts of the country.

You will need $ 76,900 for a 10% deposit on a house at the lower quartile price in October 2020 Auckland of $ 769,000, while a 20% deposit will set you back $ 153,800.

With a 20% deposit you will need a $ 615,200 mortgage and a payment of approximately $ 572 a week.

That would cost just under a third of the pay of a take-home first-couple couple, which should be quite affordable.

But if they only had a 10% deposit, the mortgage payment would jump to $ 725 a week, taking up nearly 42% of the take-home paycheck.

By then, their weekly cash flow will start to tighten and that means that housing in Auckland is starting to enter unreachable territory for people on average salaries without large deposits.

The table below summarizes the main affordability measures for buying a house at the current lower quartile price in all major regions and districts across the country, with both 10% and 20% deposits.

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