Nine years to save for a 20% house deposit - do you think houses are cheaper?

1. The recovery remains patchy

This property market upturn could prove to be underwhelming compared to previous cycles, and is likely to be variable from month to month and across regions too. Most notably, measured across estate agents and private deals, sales volumes in January were only 2% higher than the same month last year, with key markets such as Auckland, Hamilton, and Dunedin actually seeing a drop in sales. In fact, the national total in January of around 3200 sales was basically (apart from January 2023) the lowest for that month of the year since 1983. It wouldn’t be a surprise to see a bounce-back in February, but still, the ongoing pressures from high mortgage rates are pretty clear to see.

2. Houses are cheaper, but not cheap

Another factor behind the variability of this recovery phase so far is simply that housing affordability remains stretched. Yes, if you look at measures such as the number of years it takes to save a deposit, property is less expensive than it was at the worst point in the first quarter of 2022, when it took 11.5 years, compared to 9.3 years now.

But even so, I doubt many people are rushing around saying: "Look how cheap houses are!" Indeed, an alternative measure – mortgage payments as percentage of gross average household income – remains at 49%, still close to the toughest figure on record, of 52% in late 2022. Clearly, we still have a significant affordability challenge in our housing market, which may be helped to some degree over the medium term by caps on debt to income ratios. Ultimately, however, it’s about building enough houses (of the right type/location) to meet demand.

3. Rents are still rising quickly too

Meanwhile, housing costs remain problematic for tenants too, with the latest Stats NZ figures showing that rents on new leases rose by 6.8% in the year to January – more than double the long-run average rate of 3.2%. This reflects recent wage growth, as well as the standard combination of high demand (stemming from net migration) and tightening stocks of available rental properties. At a regional level, there’s clear strength in rental growth in Auckland and Christchurch, but all of the other main centres are seeing rents rise fairly quickly too.

CoreLogic chief economist Kelvin Davidson: "Clearly, we still have a significant affordability challenge in our housing market." Photo / Peter Meecham

4. Debt to income ratios back in the spotlight

The latest figures showed that lending on high debt to income ratios remains minimal at present – with only 6-7% of first home buyer loans going out at DTI >6, and a very similar figure for investors at DTI >7. These figures are way below the proposed 20% caps, with high mortgage rates currently doing the job of restraining the size of loans in relation to incomes. Indeed, the DTIs are all about the next cycle, and will only start to bind when mortgage rates drop again. Over the longer term, they won’t stop cut off lending to investors, but it will likely be a slower process to grow a portfolio.

5. Recession averted?

Finally for this week’s commentary, it’s quieter in terms of data releases over the next few days, but I’ll still be watching for the latest NZ Activity Index on Thursday, covering January’s performance. The NZAC hints that we might have avoided recession in the final quarter of last year, so it’ll be interesting to see how 2024 has started off. Remember there are trade-offs here; a stronger economy should support employment and the housing market, but it’d also tend to keep inflation a bit higher for longer, sustaining the pressure on mortgage rates.

- Kelvin Davidson is chief economist at property insights firm CoreLogic