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Affordability of Housing: Concepts, Measurement and Evidence - WP 06/03

4.1.3  Potential home-owners’ housing costs

We have calculated the proportion of income that mortgage repayments would represent if a house were bought, given current house prices and interest rates. We have assumed a 20% deposit[17] and a 25-year term. We have used the median house sale price in each quarter, obtained from Quotable Value New Zealand (QVNZ).

We have used two different interest rates, both obtained from the Reserve Bank of New Zealand (RBNZ). The first is a strictly floating rate. It is the average floating rate given to new customers, weighted by the balance sheets of each major bank at that date. The second rate is a combination of floating and fixed. It is the average rate of mortgage service, weighted not only by bank but also by the relative amounts of fixed and floating take-up and the take-up of various terms of fixed rates.

Figure 4 – Ratio of average rent to average income

We obtain the average income data used from the HES. After-tax figures, and the estimates of non-survey years, have been obtained and estimated using the previously described methods. We also assume that income is equal for every quarter of a given year to June (since the most recent HES surveys occurred in June and estimate income in the previous 12 months).

Figure 5 shows the trends in prospective mortgage repayments as a proportion of income, using the two different interest rates. Since the majority of mortgages were floating in the 1980s, this represents an appropriate line for that period. Then since about 80% of mortgages today are at fixed rates, the floating rate is considerably less relevant. So the main trend follows the floating rate line until the two diverge, at which point the combination rate should take preference.

The proportion of income spent on mortgage payments was very high from 1985 to1989, much higher than in the early 1980s, after which mortgages became more affordable from 1991 onwards until 1994. The proportion of average income went back up again until 1998, but this period of relative unaffordability was not as high as that of the 1980s. The value then stayed somewhat stable at a proportion of around 0.32 until 2002, when purchasing a home become increasingly unaffordable. Using the more relevant combination rate, this current period of unaffordability is at a slightly higher level than the peak in the mid 1990s, but not as unfavourable as that of the 1980s.

Figure 5 – Ratio of prospective mortgage payments to average net household income

A similar measure is the AMP Home Affordability Index, calculated quarterly by the Massey University Real Estate Analysis Unit. This index measures the ability of new home-buyers to service their mortgage, given current levels of income, house prices and interest rates. It is not directly comparable with our above ratios, as the data used is slightly different, but as we see in Figure 6, the general trend is the same. The AMP index only started in 1989, so we only see the very end of the period of relative unaffordability that existed in the 1980s. Figure 6 also shows, for comparison, the prospective mortgage repayments as a proportion of net household income (using the combination rate; shown originally in Figure 5).

Figure 6 – AMP Home Affordability Index; ratio of prospective mortgage payments to average net household income

The trend shown in the previous two figures is the average repayment relative to the average income. We have also calculated similar ratios for low-income earners and lower priced houses. Figure 7 shows the ratio of prospective mortgage payments to income. But in this case the house price used is the lower-quartile sale price in each quarter, from QVNZ. The income is now the 20th percentile individual income, obtained from the NZIS. The HES only gives average values, so we use the NZIS for this purpose, requiring us to use gross individual income. The interest rates are the same. The data starts in 1997, since this is when the NZIS began. This implicitly assumes that lower-income people purchase lower-priced houses.

Figure 7 – Ratio of prospective mortgage payments to income; LQ house price & 20th percentile gross individual income

The trend is roughly similar to that for the average. Affordability improves (values get smaller) from 1997 to 1999. There is a small hump in 2000-2001 (which we also see on the average figure, only it is dwarfed by the larger humps). Affordability then deteriorates from 2002 to present. However in this figure, the high point in 2005 (for the combination rate) is lower than that of 1997. Even though affordability has deteriorated in recent years, it is still currently better than in 1997.

This trend for low-income and low-cost households compares favourably to the trend for the average. Although the general pattern is similar, the recent deterioration in affordability is greater for the average households than for the lower quartile households, relative to the level in the late 1990s. However this carries the caveat that the data used are not directly comparable.


  • [17]We also analysed 5% and 10% deposits. There was a simple level shift on the graph, but the trend did not change.
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