Mortgages require bigger income

WELLINGTON: House prices may be falling, but higher interest rates mean the income needed to buy a house is rising.

The average annual income of a firsthome buyer (or a pair or group of firsthome buyers) who took out a mortgage in June was $142,000, according to data collected by the Reserve Bank.

This was nearly $7000 more than the average in November last year, when the median house price was 8% higher, according to the Real Estate Institute of New Zealand.

Similarly, the average income of an owneroccupier (without investment property) who took out a mortgage in June was $182,000 — around $15,000 more than the average in November.

CoreLogic head of research Nick Goodall attributed the lift in incomes required to buy houses mostly to rising interest rates.

The average fixed twoyear mortgage rate doubled to 5.2% between November and June, according to interest.co.nz.

The monthly repayments of someone with a $400,000 mortgage (with a 30year term) would have been $595 higher, at $2,196, if they were charged the average fixed twoyear rate in June this year versus in November last year.

Because higher interest rates mean it is more expensive to service a mortgage, banks are requiring borrowers to have higher incomes relative to the amount of debt they are seeking.

Of all the new mortgage lending banks did in June, exactly half went to borrowers seeking debt worth more than five times their annual incomes. This portion was down from 60% in November.

Reserve Bank data shows banks have been reining in their lending to borrowers who are seeking a lot of debt compared to their incomes fairly consistently across borrower types.

In June, for firsthome buyers, 47% of new mortgage lending went to borrowers seeking debt worth more than five times their incomes.

Mr Goodall noted there are also other factors tightening credit conditions, beyond higher interest rates.

Changes to the Credit Contracts and Consumer Finance Act, which took effect in December (and were watered down a little last month), require lenders to be more judicious to ensure borrowers do not take on more debt than they can handle.

Banks will also be wary the Reserve Bank is working to have a framework for debttoincome ratio restrictions in place this year, so restrictions can be introduced by mid2023 if required, Mr Goodall said.

If used, these restrictions would limit banks from lending to borrowers seeking debt worth a certain amount more than their incomes.

In an environment where interest rates are rising and house prices are falling, risk aversion by banks may also extend to borrowers, he said. —