The Home Loan Affordability Reports have had a major makeover – what has changed and why we have changed the way we measure home loan affordability in New Zealand

Today we are launching a major upgrade of our Home Loan Affordability Reports..

This note explains what has changed and what hasn’t.

The changes allow us to provide a more realistic assessment of mortgage affordability as we face a period of unprecedented change in housing markets throughout the country..

The key changes

For the first time we have produced separate Home Loan Affordability Reports for the fast growing regions on Auckland’s flanks, Rodney to the north and Pukekohe and Papakura to the south.

With Auckland bursting at the seams, these districts are expected to provide much of the new housing stock that will be needed to house its burgeoning population, so it’s important that we track affordability in these areas and the forces that shape it.

The first reports for Rodney, Papakura and Pukekohe have produced some surprising results.

Secondly, we have started basing our affordability calculations in all regions on mortgages with 30 year terms, rather than the 25 year terms that were previously used.

This was done to reflect changes in borrowing patterns, with longer term mortgages becoming the norm as house prices have risen.

The changes this has wrought in the affordability figures have been backdated to allow consistent comparisons to be made over time.

The reports have also been expanded to include three typical buyer affordability profiles in all 41 regions, cities and districts that are covered.

The First Home Buyer Affordability Reports, which are the most widely read, will continue, as will the second rung Young Family Buyer Affordability Reports.

However a third buyer’s profile has been introduced, the second rung Older Family Buyer Affordability Report.

This measures affordability for a couple where both are aged 35-39 and who are assumed to have purchased their first home 10 year ago.

It measures how affordable it would be for them to move up to the second rung of the property ladder and buy their next home at the median selling price in each district.

And we will no longer be publishing the affordability reports for buyers on one income, although we will continue to maintain that series on our database, so if anyone wants to access the data they should contact us.

So there are now three profiles for each district:

– first home buyer households
– second rung buyer households with a young family
– second rung buyer households with an older family

These profiles have an age and component set as follows:

– first home buyers are aged 25-29, a household with one male and one female partner, both working full time and earning median incomes for their age. They buy their first home at the first quartile price level. The deposit they have is what they saved for four years prior to the purchase, or 20%, whichever is lower.

– second rung households with a young family are aged 30-34 where the male is working full-time, the female 50% part-time, and they have a child under 5. They sell their first home to buy a median-priced house, and the deposit is the equity they extract from the sale of that first home. This includes their original deposit, the value of the principal repayments they made on their first loan, plus the capital gain (if any) they made on that first home. An allowance is made for the Working for Families tax credit in their income calculation.

– second rung households with an older family have done something similar except they waited another 5 years to do it. Their age band is 35-39 years. As such, both partners are now working full time at median pay levels for their age.

An important feature of the second rung buyer affordability profiles is that they will show how equity is accumulated in households over time and its importance in the property market. 

A small additional detail is that we are deducting the cost of the real estate agent’s fee when the first house is sold, from what is available for the new house purchase.

And we now report all three profiles within one new fresh and easier-to-read Report for each location.

What hasn’t changed

The core metric remains the same: home loan affordability measures the relationship between take-home-pay and mortgage payments.

The core standard remains the same: it is considered unaffordable if the mortgage payment consumes more than 40% of the take-home household income.

Our coverage remains for all regions and for all major urban areas, including sub-regional districts in Auckland and Wellington.

Our household income calculations still add back the Working for Families tax credits if that is applicable.

Although we will no longer be publishing the data, we will be maintaining the old series in the background. If you need updates to these, please contact us.

We will also still be maintaining our house-price-to-income multiple series unchanged.

The result

We believe this new, expanded approach is a better, more realistic way to assess whether there is stress for Kiwi families when they are buying in local markets.

You can read the May 2016 report here. Follow the links to the regional and city reports.

Our menus and navigation have changed to deliver the new Reports.

The availability of affordable housing options when most households are formed and grow has an important social value.

Although these reports do not look at affordability issues for people on low incomes, which is an increasingly important social issue, we feel that would require a quite different approach to that taken in these reports.

Our focus will remain on measuring affordability for ordinary Kiwis earning median incomes for their age, as their families start, grow, and move up the property ladder.