I frequently hear of talk from those with a vested interest in property how affordable houses are in New Zealand at the moment thanks to record low interest rates.

They conveniently forget one enormous thing though. How much the house costs to buy! The purchase price.

Then they will say once you’ve got a deposit it’s fine. It’s not fine though. It’s extremely difficult for those getting into the market now.

With first home buyers entering the market in record numbers, many will be stretching themselves financially thin.

Let’s run some numbers to see the affordability of houses relative to income over the last 18 years.

How affordable are New Zealand houses?

For the numbers I have taken the national median house price as at December of each year. I have assumed a 20% deposit and a 6% mortgage interest rate on a 30-year loan.

Obviously monthly mortgage payments have gone up as house prices have gone up. So what you may say? Incomes have also gone up. But have they gone up by enough?

We will now compare median household incomes in relation to the mortgage repayments:

In 2001, you needed just 0.6 times annual median household income to provide a 20% deposit, and once you had that deposit your monthly mortgage repayments were just 18.1% of monthly gross income.

Compare that to the end of 2019 where you needed almost 1.5 times (2.5 times more than in 2001) annual median household income to get a deposit, and almost 40% of gross income is going towards mortgage payments for the ‘middle’ New Zealander.

Well over twice as unaffordable as that of a 2001 mortgage holder, even after you have paid for your deposit.

Add in other home ownership costs such as insurances, rates, and maintenance and you are probably looking at between 50% and 60% of your GROSS income going towards your house.

That doesn’t leave a lot for other expenses and saving for the average New Zealander.

Final thoughts

Houses are unaffordable no matter which way you slice it.

And the figures used were the national medians. The unaffordability is even worse than what I have outlined in over half of New Zealand, including Auckland, Tauranga, Wellington and Queenstown.

You may argue that mortgage interest rates are currently below the 6% used in my example, but they won’t stay this low forever. 6% is a fairly conservative 30-year average.

So before you go believing that real estate agent about how affordable houses are with such low interest rates, remember two important things.

1/. The purchase price is significantly important to your monthly mortgage repayments

2/. Interest rates will not stay this low forever

Don’t get sucked into the better affordability debate thanks to low interest rates. Low interest rates are no match for increasing house prices.

Affordability is getting worse every year, as incomes are not keeping up with house price increases. They have never been more unaffordable. We are needing more of our income to pay for the initial deposit, and then we are needing more of our monthly income to keep up with the payments.

The fact that more companies are cropping up that offer shared ownership with other kiwis shows it all really. People are so desperate to own that they are willing to take huge risk and pay exhorbitant fees to do it.

Don’t let this increase in unaffordability make you think you need to rush in before it’s too late. In the short term you can do just fine with renting if you are disciplined. Keep saving and investing and your time will come.

The message is don’t rush in before you are mentally and financially ready.

So before you decide to listen to someone advising you how cheap and affordable houses are at the moment thanks to low interest rates, then understand that they don’t know what they are talking about.

The numbers don’t lie. Those with a vested interest do.

The information contained on this site is the opinion of the individual author(s) based on their personal opinions, observation, research, and years of experience. The information offered by this website is general education only and is not meant to be taken as individualised financial advice, legal advice, tax advice, or any other kind of advice. You can read more of my disclaimer here