Daily Briefing, Monday February 25, 2008

Intro
Hello. I’m Bernard Hickey with the daily briefing from interest.co.nz…
Today, we’ll look at home loan affordability and whether the recent house price falls have been enough to improve affordability.
We’ll also look at the prospects for shared equity home loans. Could we have them within a year and are they a good idea?

Affordability
But firstly we look at the latest news on housing affordability. The news is better, but it’s still very bad, and it won’t be healthy again for a very long time unless we see a house price correction, the size of which we’ve never seen before in New Zealand. More on that in a minute.
The Fairfax Media Home Loan affordability survey produced by interest.co.nz shows that home loan affordability improved marginally in January.
That’s because the median house price fell 1.4%. But most of this gain was wiped out by higher interest rates. Without too much fanfare, longer term fixed mortgage rates have been rising in recent months as turmoil on global credit markets increases the risk premium for New Zealand debt and banks have to pay each other more to compensate for the risk of failure.
That means the average interest rate on a 2 year fixed rate mortgage has risen to 9.51% from 9.34% between December and January.
The overall effect is that it now takes 80.8% of the after tax pay from a median income to service the mortgage on a median house. This measure assumes the home buyer has a 20% deposit. It takes into account wage increases, house price moves and interest rate moves.
Affordability for first home buyers also improved slightly to 72.5% of take home pay from 73.4% in December. This measure takes the median income of someone in the 30-34 year old age group and works out what they would need to service the mortgage on a first quartile house. Currently that’s a house worth 0,000.
So what does this all mean for house prices.
Bankers generally say that a mortgage is affordable when it consumes 40% of your take home pay.
By this measure home loans on current house prices are very unaffordable. To get back to the 40% level we were at in early 2003, the median house price would need to fall about 30% to 0,000.
If wages kept growing at current rates, and interest rates were steady, and house prices didn’t fall, then it would take until 2032 before wages caught up with prices.
We think the variable that will move to square this equation and make housing affordable is house prices. They are already falling. They have a way to go yet.

Shared Equity
Now for a look at the prospects for shared equity home mortgages in New Zealand.
You might remember that Helen Clark floated this idea a couple of weeks ago in her first speech of the year in parliament.
This is where a bank or a government puts some money into the deposit for a home loan and then takes a share of the capital gain on the house.
There is a scheme like this operating in Australia. It’s being run by Adelaide Bank and its partner Rismark, which owns the patents on this type of mortgage in Australia and New Zealand.
In Australia the scheme works like this. Rismark finds international investors and pension funds to invest some money in Australian homes.
Adelaide Bank then finds a home buyer and provides a mortgage for say 70% of the home value. Rismark’s investors put up 20% and the homebuyer puts up 10%. The deal is that Rismark’s investors will keep 40% of the capital gain on the house.
The scheme was launched in Australia about a year ago and hasn’t been a raging success so far, even though Australia has a massive housing affordability problem, just as we do.
The problem has been many homebuyers just don’t want to give up the capital gain and most don’t have any problems finding the mortgage. Often they’ll just take out a 100% home loan and simply pay a higher interest rate rather than share the capital gains.
However, Rismark is pushing ahead with plans to set up such a scheme in New Zealand. It’s managing director Chris Joye reckons there’ll be a scheme set up in New Zealand within the next year.
It could come from the government through Housing New Zealand, which would offer it to low income people. It could also come from a bank.
There’s a couple of hurdles to clear though. First the tax laws would have to changed to allow a bank to offer this so the equity investment isn’t treated like a debt investment.
And secondly, international investors who would put up the funding for this aren’t too keen on complex mortgage-back derivatives right now, particularly in a market where house prices are falling and the words complex, mortgage-backed securities and housing markets are often used in the same sentence as the word toxic.
Because just as capital gains can be shared, so would the capital losses. I would be surprised if we saw such a scheme within the year.
I’m Bernard Hickey from interest.co.nz with the Daily Briefing. Catch you on Tuesday.