Is the Auckland market creating an economic underclass?

According to the latest housing price survey, housing prices in Auckland risk creating an economic underclass.

According to the latest’s Home Loan Affordability Report, a big jump in the lower quartile house price in Auckland last month risks putting the dream of home ownership further out of reach for first home buyers.

The report showed the lower quartile selling price in Auckland was $629,500 in February, within $1000 of their all-time high.
The Home Loan Affordability Report calculates how much a typical first home buying couple (a couple where both are aged 25-29 years and working full time) would have to set aside each week to make the mortgage payments on a lower quartile priced house, and compares that to their median take home pay based on the pay rates in Statistics NZ’s Linked Employer-Employee Data Survey.

This shows that the median take home pay for typical first home buying couples in Auckland was $1579.50 a week in February, from which they would need to set aside $756.07 a week to meet the mortgage payments on a lower quartile-priced home ($629,500), which would be 47.9% of their take home pay.

The report considers housing to be affordable when mortgage payments total no more than 40% of take home pay, but it does not take in account other property-related expenses such as rates, insurance and maintenance which would be likely to be significant.

Compare home loan interest rates

The Reserve Bank of New Zealand cut the official cash rate (OCR) yet again in March this year, to just 2.25%. This is flowing through to home loan interest rates, with research finding the minimum, maximum and average home loan rates currently in its database as:

Table: Residential Home Loan Market – Snapshot of the current market (30/03/2016)
StatStandard Variable1 Year Fixed2 Year Fixed3 Year Fixed4 Year Fixed5 Year Fixed
Average 5.62% 4.53% 4.64% 4.89% 5.09% 5.21%
Min 5.45% 4.15% 4.25% 4.64% 4.89% 4.99%
Max 5.85% 4.85% 4.99% 5.25% 5.35% 5.40%
Source:, the search results do not include all home loan providers, and may not include all features relevant to you.

Unfortunately, interest has found that any benefit of falling interest rates has been more than negated by rising house prices.

“There’s only one housing market”

What happens in Auckland doesn’t necessarily stay in Auckland according to a study from Motu Economic and Public Policy Research Trust, which looked at real house prices (official house prices adjusted by a consumer price index) in sixteen cities in Australia and New Zealand.

“We found that all sixteen cities share a price trend and are influenced by the same long-term factors,” said Arthur Grimes, Senior Fellow at Motu. “Of course, temporary ‘shocks’ such as an influx of migrants have an effect, but these wear off. This means the major cities in Australasia share a weak form of a single housing market.”

The paper looked at price dynamics and found that temporary shocks to Australasian house prices are experienced first in five Australian cities (Melbourne, Sydney, Adelaide, Canberra, and Brisbane). The effects then flow through to the more peripheral Australian cities (Perth, Hobart, Darwin), plus Auckland and Wellington. Finally the effects reach the price ‘laggards’ in New Zealand (Dunedin, Christchurch, Palmerston North, Hastings, Tauranga, Hamilton).

“We found little evidence that monetary policy is effective in determining long-run real house prices,” said Dr Grimes. “This means governments need to look at areas other than macroeconomic policy if they are interested in controlling house prices.”

Indeed, in addition to a rising Auckland market, the survey this month found that the lower quartile house price is also sitting at an all-time high in five other regions: Waikato/Bay of Plenty, Wellington, Nelson/Marlborough, Central Otago Lakes and Southland.

However in spite of rising prices around the country, Auckland remains the only region where housing is seriously unaffordable for first home buyers.

Compare home loan interest rates


Get expert advice before you buy

It’s tempting, particularly for first home buyers, to feel a sense of panic and urgency to buy. Don’t let fear of missing out prompt you to jump into the market without doing due diligence though; independent expert advice is essential when preparing to buy property – whether it’s by negotiation, or by auction or tender, says Harcourts NZ CEO Chris Kennedy.

When markets become heated and competition for properties is high, particularly at auctions, vendors sometimes supply potential buyers with a building report as well as LIMs and title checks.

“If time is tight and competition is high ahead of a sale, vendors can supply reports with the aim of making things easier for prospective buyers, and giving them fewer jobs to do.

“When the market heats up and auctions are brought forward, buyers start to worry they’re going to miss out. In those circumstances it can be very tempting to take a vendor-supplied report. By all means take it as a reference, but we’d still recommend buyers do all their due diligence and commission their own,” said Mr Kennedy.

He suggested asking friends or trusted associates who have used reliable building inspectors and would recommend them.

“There’s no advantage in winning an auction if you end up with problems you hadn’t foreseen,” Mr Kennedy said.

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