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Overvalued but still in demand

Editorial

The latest CoreLogic report on housing affordability makes grim reading for aspiring home buyers. Although there are signs of some relief in the future, that’s unlikely to come soon enough for many.

The biannual report says the average property value rose 15 percent in the first six months of the year while average gross household income lifted only 1 percent. An average property now costs eight times what an average household earns in a year, well above the long-term average of 5.8 times.

“Even though mortgage rates have remained very low, albeit they are now starting to rise, housing affordability has simply become worse and that’s from an already stretched position,” CoreLogic chief economist Kelvin Davidson said.

The report says it now takes 10.6 years for the average family to piece together a 20 percent deposit for a property, up from 9.9 years. That is almost three years more than the long-run average of 7.8 years.

On average, households that take on a new mortgage are spending 38 percent of their income on repayments — while, in a double blow for aspiring homeowners, average rental payments now stand at 21 percent of the average household income.

Davidson said mortgage repayments were back to levels not seen since early 2018 when typical fixed mortgage rates were much higher, above 5 percent.

It would take about five years for the raft of measures brought in by the Government and the Reserve Bank of New Zealand to help cool the market and slow down house price growth, he said.

Conversely, Reserve Bank governor Adrian Orr is predicting that house prices could begin to drop as early as next year and says a 5 percent fall by 2024 is a “very modest” estimate.

However, the magnitude and timing of such a drop was highly uncertain. What’s more certain, he said, is that the market is due for a correction and that the house price increases seen recently are unsustainable.

As people continued to “pile into” assets like houses that were overvalued, there was “a risk on our hands . . . . We are concerned about financial stability,” he said.

Meanwhile people building a new home face a rapid rise in the price of materials such as timber, bricks and steel of up to 50 percent in the past year, which has led to builders invoking escalation clauses within fixed-price contracts. Lawyers say fixed-price contracts may not actually be enforceable.