House prices are falling, so homes are more affordable!? Not so fast

Friday, 22 April 2022

Tony Alexander says his December real estate survey with REINZ shows there is reduced buyer demand, although house prices hit new records in November. (Video first published on December 13, 2021)

ANALYSIS: Lower house prices might be here, but that doesn’t mean it is getting easier for first-home buyers to buy a house.

The Stuff measure for new home affordability launched in December 2020 and tries to measure how housing affordability is changing for first-home buyers.

It looks at two things: how many weeks it takes those buyers to save for a deposit, and how big their fortnightly mortgage repayments are.

Ever since the dashboard (which you can see below) was created those two measures have moved together in the same direction: When the level of fortnightly mortgage repayments went up, so too did the number of weeks it took for people to save for a deposit.

* How much harder is it to buy a house in 2022 than in 2002?

* Housing affordability could take decades to improve - ANZ

* First-home deposits further out of reach, affordability dashboard shows

House prices have taken a turn, but are they really getting more affordable?

This is because house prices have been rising, increasing the amount of money people need to save for a deposit, and also increasing their fortnightly mortgage repayments.

But then in February something unexpected happened, these two measures started moving in opposite directions to each other.

The level of fortnightly mortgage repayments increased, but the number of weeks it took to save for a deposit actually went down.

The median price paid by first-home buyers declined by more than $50,000 between January and February, bringing down the number of weeks it might take a first-home buyer to save for a deposit by 19 weeks.

However, while this was happening the interest rates attached to mortgages also increased, driving up the fortnightly mortgage repayments.

With a tough inflation fight ahead in the coming months, this is a trend that could easily continue as the Reserve Bank continues to ramp up the official cash rate in an attempt to put a stop to rising prices across the board.

But is it really true that these two measures have diverged?

In reality, this is unlikely to be the case, and the reason for that is something that has become a real topic of discussion over the last few months: inflation.

Inflation might mean higher wages, but it also means higher costs. By most measures recent wage inflation has lagged behind the price increases we have experienced.

This will make it more difficult for first-home buyers to save for a deposit because they have less disposable income.

Stuff’s affordability measure doesn’t capture this change, it only looks at how many weeks it might take a first home buyer to afford a deposit assuming they are able to put away 30% of their pre-tax income.

CoreLogic head of research Nick Goodall says if wages don’t keep pace with inflation – as has been the case recently – the actual percentage of income people can save goes down, even if their incomes rise.

In the face of rising inflation he says affordability measures like ours should actually be using a lower percentage figure to measure the declining amounts people will be able to save.

“Within affordability there’s assumptions underlying the measures. One of those essentially says you assume you can save 'X' percent of your income for your deposit.

“As the cost of living increases it’s even harder to put that money aside to get that deposit.'

Beyond the deposit there is the question of how easy it will be for people to demonstrate that they have the ability to pay back their mortgage.

Sense Partners economist Shamubeel Eaqub says house prices have risen sharply, and this has caused a large increase in the size of mortgage repayments.

He says interest rates of more than 5% are not unusual in a historical context, but what makes them more painful this time is the unprecedented rise in house prices.

“When the median house price is over a million dollars, the change of interest rates from 2.5% to 5.5% is actually a big deal.'

Banks also look at whether buyers will be able to handle further interest rate rises when they are assessing loan applications.

Australia has a “serviceability floor” which forces banks to test whether a potential homebuyer seeking out a loan will be able to afford a 3 percentage points rise in interest rates.

Goodall says we don’t have this floor in New Zealand, so banks are more free to decide how much of an interest rate “buffer” they need buyers to meet.

Either way, rising interest rates mean declining prices aren’t the boon for first home buyers that you might have thought they were.

Couple this with increased expenses thanks to inflation, and it will likely be even more difficult for first home buyers to get a mortgage.

“It takes ages to save a deposit, you’re paying higher interest and incomes haven’t kept pace,” Goodall says.

“It pretty much puts us at an almost all-time worst affordability position.'

Here’s what the Stuff affordability dashboard is made up of:

Rather than use the median house price, Stuff uses data from CoreLogic that measures the median price paid by people who have never owned property before, to get a more accurate picture of what first-home buyers are paying.
The income measure we have used, provided by Infometrics, is median household income before tax.
When it comes to measuring many weeks it might take to save for a deposit the level of savings is set at 30% of before-tax income.