New Zealand Property Investors' Federation

The NZPIF is the umbrella body for 17 local Property Investors' Associations throughout New Zealand.

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House affordability improves on back of house price, interest rate falls


Housing affordability improved by a record amount in August to its best level since January last year after house prices fell sharply and fixed mortgage rates fell below 9 per cent.

The Wizard Home Loans Affordability report for August released today reflects a 2.9 per cent fall in the national median house price in August and declining mortgage rates.

There was also slight wage growth recorded.

Tax cuts on October 1 and further falls in house prices are also expected to improve affordability significantly over the rest of 2008 and through the spring when many home sellers put their houses on the market.

This monthly report measures the proportion of a single median after tax income needed in each part of New Zealand to service an 80 per cent mortgage on the median house price in that region.

It took 74.2 per cent of the median take-home pay to service the mortgage on the median house in August, down from 77.4 per cent in July.

This 3.2 per cent improvement was more than double the previous record improvements of 1.5 per cent each in May and June of this year.

Affordability is now at its best level since January last year, but remains well above the 40-50 per cent levels seen in 2002, 2003 and 2004 before house prices took off.

"Tax cuts due on October 1 and the lower prices being offered in the housing market are likely to further improve affordability through the rest of this year," said John Grant, Wizard Home Loans, Director, New Zealand Business.

"Spring seems finally to have sprung for housing affordability," Grant said.

The report also shows the proportion required for a first home buyer (someone aged 25-29 that has saved 20 per cent of their after tax income in the previous five years) buying a cheaper house (first quartile price). The first home buyer's affordability ratio improved to 59.3 per cent in August from 61.1 per cent in July and is also back at its best levels since January 2007.

Affordability looks set to improve through the rest of 2008 as interest rates fall at the same time as house prices keep falling. Tax cuts due from October 1 are also expected to improve affordability ratios as take-home pay rises slightly for most home-buyers. Nominal wages are also rising relatively fast.

However, housing affordability remains much worse than before the housing boom took off in late 2003 and before interest rates rose from under 7 per cent in 2003 to over 9 per cent in mid-2008. House prices rose 64 per cent between November 2003 and November 2007. In July 2003 the affordability ratio stood at 43.9 per cent.

Most home-buyers are still forced to pool almost two median incomes to afford the mortgage on the median house, although that multiple has dropped from 2.1 in November last year to 1.85 in August.


The biggest driver in the improvement in August was the fall in house prices, although the 13 basis point drop in the average 2 year fixed mortgage rate was also a major driver.

The Reserve Bank of New Zealand cut the official cash rate from 8 per cent to 7.5 per cent last week and its own forecast implies it will fall to around 6.5 per cent over the next year. Banks passed on around half of last week's cut in the former of lower fixed mortgage rates. About 87 per cent of all mortgages in New Zealand are on fixed rates.

There remains some doubt, however, about how quickly banks can cut their fixed mortgage rates given the turmoil on global financial markets that has increased the international funding costs for New Zealand's banks.

The Reserve Bank's own forecasts are that the effective mortgage rate, which takes into account the actual costs of the various tranches of mortgages issued, will only drop from 8.8 per cent to 8.7 per cent over the next two years.

Every region reported improvements in housing affordability except Southland, where house prices rose in August.

The biggest improvements in home loan affordability were in Northland and Central Otago Lakes (Queenstown and Wanaka) where house prices fell 9.5 per cent and 17.7 per cent respectively in August.

Southland's affordability at 46.7 per cent remains the best in New Zealand, although it was up from 42.8 per cent in July. Central Otago Lakes at 112.9 per cent remains the least affordable, although its affordability has improved from 138.9 per cent in July.