Affordable housing: This is as good as it gets for first home buyers

1. Homes slightly more affordable

Housing affordability has been improving lately, on the back of falling house prices, rising incomes, and flatter mortgage rates. But I doubt that many people would think property in New Zealand is now “cheap”. Instead, houses are just a bit less expensive than before. And unfortunately for aspiring buyers, with house prices now bottoming out, this might also be the best affordability position we see for a while too.

Longer term, a sustained period of housing supply growth in excess of population change would clearly be beneficial for affordability. But history has shown that’s not easy to achieve. This time around, though, the supply/demand effects may be bolstered by caps on debt to income ratios for mortgages, which, if imposed in 2024, would tie house prices to incomes more closely over a cycle.

The findings of CoreLogic’s affordability report have also kicked off some discussion around whether it is better to rent or to buy. That’s never an easy one to answer. For example, paying a mortgage is, in effect, a form of forced saving, but renting tends to be cheaper and provides flexibility – nor does it need to be a worse outcome for long-term financial stability, provided that the cost savings can be dutifully invested. All that said, I doubt that Kiwis’ preference to buy is about to change dramatically.

2. More low deposit finance available and bank switching has been fairly popular

According to the Reserve Bank, $5 billion in mortgage loans were signed in July - $400 million below July 2022’s tally, and the 23rd consecutive monthly fall in mortgage lending. However, the breakdown by loan to value ratio did contain some interesting patterns, with the share of lending to owner-occupiers at a high LVR (>80%) rising from 6.4% in June to 9.1% in July – following the loosening of the rules from June 1. That’s still below the 15% cap, but nevertheless the highest share of lending at a high LVR (or low deposit) since December 2021. Meanwhile, the share of lending to investors with a 35-40% deposit (or LVR of 60-65%) continued to rise steadily too.

Meanwhile, in a win for us data-nerds, the RBNZ also published a new set of figures last week, which breaks down the total into loan type – house purchase, top-up, bank switch, and ‘other’ (such as bridging finance). Some early snippets:

- The value of purchase loans was down by 5% in year to July, top-ups down by 13%, but bank switches up by 1% – illustrating the impact of stiff competition amongst the banks for existing borrowers, in an environment where people have been searching for the best mortgage rates and often a tidy cash-back too.

- The average size of a property purchase loan in July was $546,000, a switch was $600,000, and a top-up $105,000.

CoreLogic chief economist Kelvin Davidson: "Paying a mortgage is, in effect, a form of forced saving, but renting tends to be cheaper." Photo / Peter Meecham

3. Labour market is still crucial

The low unemployment rate and steady employment growth have been vital in helping households adjust their finances as mortgage rates have risen, and the successful management of this process so far has kept loan repayment arrears and mortgagee sales very low. The next update of labour market figures will be this week in the form of filled jobs for July. Recent growth has been solid (13 rises in the past 14 months), and there seems a good chance that this continued in July.

4. The first glance of another recession?

This week we’ll also get the NZ Activity (NZAC) Index for July, which is a timely indicator for the official GDP figures. The NZAC suggests we pulled out of recession over April-June, but there’s also a fairly widespread expectation that there’ll now be a double-dip over the third and fourth quarters of this year. This week’s NZAC figure will start to tell us a bit more about how likely that is, and – although it seems strange at first glance – another recession might actually be good news, in the sense that it caps any further increases in the OCR or mortgage rates.

5. Construction sector is still slowing

Stats NZ will publish July’s new dwelling consents data on Wednesday, and it’s almost certain that there’ll be another fall. We doubt that the supply slowdown that’s now firmly underway is a reason to think house prices will suddenly snap back over a 6-12 month horizon, but we certainly need to avoid a GFC-sized drop in new house construction – as that would certainly raise the risks of shortages over the medium term.

- Kelvin Davidson is chief economist at property insights firm CoreLogic