CoreLogic: Housing affordability dramatically declines across New Zealand

Average property value hits record high in series' 18-year history

CoreLogic: Housing affordability dramatically declines across New Zealand

House price growth across New Zealand has resulted in rapidly declining affordability, according to the latest CoreLogic NZ Housing Affordability Report.

As of Q2 2021, CoreLogic stated that the average property value across New Zealand is 7.9 times the average annual household income, a record high in its series’ 18-year history. The latest figure is also a significant increase from 7.4 times three months ago, and 6.6 times 12 months ago.

Property values in New Zealand rose by 15% during the first six months of 2021, well ahead of the increase in gross average household income that rose by 1.0%, showing the acute affordability challenges across the country, according to CoreLogic NZ chief property economist Kelvin Davidson.

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

Read more: Experts release property market forecasts amid lockdown

CoreLogic pointed to declining affordability as a key reason for new regulatory changes introduced this year, focusing on investors, including requiring a 40% deposit for these buyers, a reduction in the ability to claim interest as a tax-deductible expense, and an extension of the bright-line test for additional property purchases.

While these factors, along with rising mortgage rates, should contribute to a slowdown in property value growth, especially if the current lockdowns impact the economy and employment, Davidson claimed the slowdown would not 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, noting that the Reserve Bank of New Zealand (RBNZ) recently estimated that an adjustment phase could take as long as eight years.

In addition, it currently takes more than a decade to save a house deposit (10.6 years), beating the previous record high of 9.9 years set in Q1 2021. It also takes almost three years longer to save for a house deposit than the long-term average of 7.8 years.

On average, households taking out a new home loan spend 38% of their income on their mortgage repayments – compared to tenants, whose rental payments absorb 21% of household income. Despite historically low interest rates, average mortgage payments as a proportion of household income have increased from 32% a year ago, according to CoreLogic.

“However, this is not to say that renting is easy either – indeed, that figure of 21% is also above average. 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% of their income being spent on accommodation costs,” Davidson said.

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