By Greg Ninness

The actions taken by the Reserve Bank to cut interest rates last year have created a growing divide between the “haves” and “have-nots” in the housing market.

Interest.co.nz’s latest home loan affordability report highlighted the growing inequality that is growing between people who already own a home and those who are struggling to buy one.

According to the report, the decline in the average two-year fixed mortgage interest rate began in March of last year when it fell to 3.31% from 3.52% in February. From there it continued to decline, falling to 2.58% in November / December. In March, the Reserve Bank cut the official exchange rate by 75 basis points to a record low of 0.25%, where it has since been amid the COVID-19 pandemic.

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

Nationwide, the bottom quartile price increased $ 36,000 (11.0%) in Taranaki and $ 123,000 (29.4%) in Hawke’s Bay during this seven-month period. Prices in the bottom quartile increased by $ 94,300 (13.4%) in Auckland, by $ 74,000 (15.6%) in Waikato, by $ 80,000 (16.0%) in Bay of Plenty, by 102 $ 128 (18.6%) in the Wellington area, $ 65,000 (18.1%) in Canterbury and $ 81,500. (20.6%) in Otago.

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

For existing homeowners, these extraordinary price gains were like manna from the sky. It was like money falling from the sky, increasing the average homeowner’s net worth by over $ 100,000 over seven months, or just under $ 500 per day, even though their property was relatively small. at the bottom of the market.

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

Not only did the fall in interest rates increase homeowners’ equity, and therefore their personal wealth, but if they had taken out a mortgage on their property, it would have lowered their mortgage payments.

Monthly payments on a $ 300,000 mortgage at the two-year average fixed rate of 3.31% in March 2020 would have been approximately $ 1,316 (for a 30-year term). But by November / December, the interest rate had fallen to 2.58%, reducing monthly mortgage payments from $ 300,000 to $ 1,198, saving the homeowner $ 118 per month.

These two factors combined have dramatically improved the situation for existing homeowners, both in terms of overall wealth and daily cash flow.

A kick in the guts

But for would-be first-time homebuyers hoping to move up the bottom rung of the real estate ladder, falling interest rates have been a kick in the guts.

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

The amount required for a 10% deposit increased from $ 44,600 to $ 55,000 during 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 increased from $ 70,520 to $ 79,950 on the same period.

In addition to increasing the amount of money potential first-time homebuyers 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 have to borrow $ 495,000 to get a nationally priced home from the lower quartile of REINZ. And if the house was in Auckland, they would have to borrow $ 719,550.

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

Adding to their misery, any benefit that lower interest rates would have brought through reduced mortgage payments were more than offset by the price hike between May and December of last year.

The amount of money a first-time buyer would need to set aside for 80% mortgage payments for a home bought at the bottom quartile nationwide price of $ 446,000 in May would have been around $ 342 per week. But by December, the bottom quartile price had risen to $ 550,000, bringing the amount needed for mortgage payments to $ 405 per week.

If the first buyer only had a 10% deposit, the amount required for mortgage payments would have increased from $ 446 to $ 508 per week. If the house were in Auckland, the amount that would have 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 of lower interest rates on existing homeowners and those who have not yet purchased their first home could not be more marked.

In all respects, owners of existing homes are much better off. They are richer and have to pay less in mortgage payments. For them, falling interest rates were like a shower of money from the sky.

But for hopeful first-time 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, mortgage payments will consume more of their household budget.

For many of those with average incomes, owning a home quickly becomes an impossible dream.

The tables below show the top affordability measures for typical first-time buyers in all of New Zealand’s major regions and districts, with down payments of 10% and 20%.

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