Rising House Prices Still Drive Housing Affordability Metrics

couple-with-houseThe Massey Affordability Index takes into account the cost of borrowing as well as house prices and wage levels. This December quarter has seen a decline in affordability driven mainly by the continued spillover of the Auckland house price levels into the regions. Overall, home affordability declined by 2.8% in this quarter with some big declines in the provincial centres of Taranaki (12%); Northland (9.7%); Southland (6.7%); Nelson/ Malbrorough (6.2%); and Manawatu/Wanganui (6%). Affordability did improve in this quarter in Central Otago Lakes and Auckland. Central Otago Lakes improved by 7.3% and Auckland improved slightly by 1.1%. Auckland and Central Otago Lakes do, however, remain the least affordable regions in the country, 56% and 45% less affordable than the rest of New Zealand. On a year on year basis to December we see mixed results with predominantly slight improvements in affordability in some regions of the country but some significant declines in other regions. This is largely as a result of falling mortgage interest rates in those regions where affordability has improved, but continuing rising annual house prices in other regions has more than outweighed the interest rate factor. On an annual basis Canterbury has the highest magnitude of improvement (9.4% more affordable) and Central Otago Lakes has the highest magnitude of decline (11% worse off). Canterbury’s improving affordability can be attributed to lower house price increases over the year, and the decline in affordability in Central Otago Lakes exacerbated by the booming tourism industry putting stress on the supply of affordable housing. Southland and Manawatu/Wanganui remain the country’s most affordable regions.

 

Notwithstanding a mostly mixed annual and declining quarterly affordability result in our index, house prices to wages remain very high and this factor continues to place strain on first home buyers, especially in the two most expensive regions. Across New Zealand as a whole our house price to annual wages ratio shows a slight deterioration with the overall ratio increasing by 0.4 to 8.7. Auckland saw a smaller deterioration in this ratio, increasing by 0.1 to 13.6. However there has been a significant improvement in this ratio in Central Otago Lakes falling by 0.9 to 12.6. Steady reductions in the OCR have pushed borrowing costs lower, easing the burden of house purchase up until now. However, more stringent deposit requirements and tougher requirements for bank lending may start to reverse the trend. This coupled with continued demand from a growing population and investors could lead again to a deterioration in housing affordability. It will be interesting to see how the downward quarterly percentage change of house prices in the high value regions of Auckland and Central Otago Lakes move as we head into 2017.

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