Low rates boost NZ’s housing affordability

According to the report, on average, New Zealand households taking out a 70% loan-to-value ratio (LVR) mortgage needed 29.7% of their income to meet monthly mortgage repayments in June 2019.

That’s as compared with 30.5% in June 2018, largely as a result of declining interest rates.

At the same time, median house prices in New Zealand increased by 4.5% in that time, which was a lower rate than the prior year, and therefore weighed less on affordability.

Further, mortgage interest rates declined by an average 0.44 percentage points while salaries increased by 2.8% in the year to March 2019.

Moody’s analyst Karen Burkhardt says this all decreases the risk of mortgage delinquencies and defaults.

They expect house price growth to continue at a slower pace over the next year, she says.

“This, coupled with low mortgage interest rates and continued modest income growth, will keep housing affordability broadly stable, which is a credit positive for rated covered bonds.”

The report also says the Reserve Bank’s OCR cuts this year will support the market, while the government’s rejection of a capital gains tax is likely to bring property investors back into the market.

But Moody’s expects growth to be moderate due to the ongoing impact of the Reserve Bank’s macro-prudential measures, and government housing policies like the foreign buyer ban and new rules for the ring-fencing of rental property losses.

The report shows that improvement in affordability varied by region, depending on the level of house price growth and the extent to which this was offset by changes to incomes and mortgage interest rates.

Auckland recorded the greater improvement but remains the least affordable region in the country.

Moody’s estimates that new homeowners in Auckland required an average of 38.2% of their household income to meet monthly mortgage repayments in June 2019, as compared with 41.1% in June 2018.

The situation in Auckland is particularly relevant for New Zealand covered bonds, as just under half of mortgages in the cover pools are for properties located in the city.

Also, of all regions in New Zealand, Auckland is the most sensitive to changes in house prices, interest rates and LVRs.

Meanwhile, affordability also improved in other regions over the year to June 2019, including Bay of Plenty, Northland, Waikato, Canterbury, Gisborne, Marlborough, West Coast and Wellington.

Improvements in affordability were largely due to lower mortgage interest rates and modestly rising household incomes. 

However, housing affordability deteriorated in Hawke's Bay, Manawatu-Whanganui, Nelson, Otago, Southland, Taranaki and Tasman, primarily as a result of rising house prices.

Better housing affordability decreases the already relatively low risk of delinquencies and defaults in New Zealand’s mortgage collateral, the report states.

That’s because the low LVR of mortgages on average in New Zealand cover pools mitigate the risks posed by poor housing affordability. The weighted average LVR of mortgages in cover pools ranges between 43.9% and 54.8%, depending on the covered bond programme.