Low interest rates have created winners and losers in the housing market as the COVID-19 pandemic rumbles on

By Greg Ninness

The Reserve Bank’s moves to slash interest rates last year caused a widening gulf to open up between the “haves” and the “have nots” in the housing market.

Interest.co.nz’s latest Home Loan Affordability Report has highlighted the growing inequality developing between people who already own a home and those struggling to buy one.

According to the report, the slide in the average two year fixed mortgage interest rate began in March last year when it declined to 3.31% from 3.52% in February. From there it continued to fall, dropping to 2.58% in November/December. March was when the Reserve Bank cut the Official Cash Rate by 75 basis points to a record low of 0.25%, where it has been ever since against the backdrop of the COVID-19 pandemic.

The cut in interest rates had an immediate effect on house prices, pushing the Real Estate Institute of New Zealand’s national lower quartile selling price up to $550,000 in December from $446,000 in May. That's an increase of $104,000 (23.3%) in seven months.

Around the country the lower quartile price increased by between $36,000 (11.0%) in Taranaki and $123,000 (29.4%) in Hawke's Bay over that seven month period. Lower quartile prices rose by $94,300 (13.4%) in Auckland, $74,000 (15.6%) in Waikato, $80,000 (16.0%) in Bay of Plenty, $102,128 (18.6%) in the Wellington Region, $65,000 (18.1%) in Canterbury and $81.500 (20.6%) in Otago.

The price increases in the middle of the market were even greater, with the REINZ’s national median selling price increasing by $129,000 (20.8%) between May and December.

For existing home owners those extraordinary price gains were like manna from heaven. It was like money dripping from the sky, pushing up the average home owner’s equity by more than $100,000 over seven months, or just under $500 a day, even if their property was a relatively modest one at the bottom of the market.

But to those who already have a home, even more will be given.

Not only did tumbling interest rates push up home owners’ equity, and therefore their personal wealth, if they had a mortgage on their property it would have pushed down their mortgage payments.

The monthly payments on a $300,000 mortgage at the March 2020 average two year fixed rate of 3.31% would have been about $1316 (for a 30 year term). But by November/December the interest rate had declined to 2.58%, reducing the monthly payments on a $300,000 mortgage to $1198, saving the homeowner $118 a month.

Those two factors combined have left existing home owners substantially better off, both in terms of their overall wealth and their day-to-day cash flows.

A kick in the guts

But for would-be first home buyers, hoping to make the leap on to the bottom rung of the property ladder, the decline in interest rates has been a savage kick in the guts.

The amount they would need to save for a 20% deposit on a home at the REINZ’s national lower quartile selling price has increased from $89,200 in May last year to $110,000 in December, up by $20,800 (23.3%) in seven months.

The amount needed for a 10% deposit increased from $44,600 to $55,000 over the same period.

In Auckland, the amount needed for a 20% deposit increased from $141,040 in May to $159,900 in December, while the amount needed for a 10% deposit rose from $70,520 to $79,950 over the same period.

As well as pushing up the amount of money prospective first home buyers would need to save for a deposit, rising prices also increased the amount they would need to borrow for a mortgage.

If they had a 10% deposit they would need to borrow $495,000 to secure a home at the REINZ’s national lower quartile price. And if the home was in Auckland they would need to borrow an eye watering $719,550.

With a 20% deposit, the size of the mortgage needed for a home at the national lower quartile price was $440,000, and in Auckland it would have been $639,600.

Adding to their misery, any benefit that falling interest rates would have delivered via reduced mortgage payments was more than offset by the rise in prices between May and December last year.

The amount of money a first home buyer would need to set aside for the payments on an 80% mortgage for a home purchased at May’s national lower quartile price of $446,000 would have been around $342 a week. But by December the lower quartile price had risen to $550,000, pushing the amount needed for mortgage payments up to $405 a week.

If the first home buyer only had a 10% deposit, the amount needed for mortgage payments would have increased from $446 to $508 a week. If the home was in Auckland, the amount that would need to be set aside each week for the mortgage would have increased from $540 to $589 if they had a 20% deposit, and from $705 to $738 if they had a 10% deposit.

So the differences between the effects lower interest rates have had on existing home owners and those yet to buy their first home could not be more stark.

By every measure, existing home owners are significantly better off. They are wealthier and are having to pay out less in mortgage payments. For them, lower interest rates have been like money raining down from heaven.

But for hopeful first home buyers, the reverse is true. They will need to save longer and harder for a deposit and when they finally have enough for a deposit, the payments on the mortgage will eat up more of their household budget.

For many of those on average incomes, home ownership is fast becoming the impossible dream.

The tables below set out the main affordability measures for typical first home buyers in all of the main regions and districts throughout New Zealand, with deposits of 10% and 20%.

This story was originally published on Interest.co.nz and has been republished here with permission.