Mark Lister, 18 February 2021

The latest report from the Real Estate Institute (REINZ) showed that while house prices have eased slightly over the past month, the market has still moved significantly over the past year.

The house price index (HPI) for Auckland is up 17.7 per cent from a year ago, while the HPI for the rest of the country has gained 20.4 per cent.

Auckland house prices compared with interest rates

auckland house prices and interest rates

That’s a substantial move, which is creating some real challenges for first home buyers and contributing to many of the social issues we face across the country.

Median prices and the considerable deposits that are required these days get a lot of the attention, deservedly so. However, a crucial piece of the puzzle that sometimes get overlooked is serviceability, which has become much less challenging in the face of record low interest rates.

The Reserve Bank website has interest rate data going back to 1964. Going back those nearly six decades, rates have never been as low as they are now. It’s safe to say they’re at the lowest levels New Zealand has ever seen.

This has had a much bigger impact on the housing market in recent years than anything else, and I would argue it has been a bigger driver of rising house prices than migration, tax policy or supply constraints in recent years.

According to REINZ, the median Auckland house price has increased 22.0 per cent over the past three years.

So, are Auckland houses that much more expensive? Well, yes and no.

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A 20 per cent deposit would be unattainable for a lot of people if it wasn’t for two KiwiSaver accounts and a first home buyers grant, maybe even some help from family. But for now, let’s also assume they were able to scrape this together somehow.

In early 2018, the median Auckland house was worth $820,000, which meant a deposit of $164,000 and a mortgage of $656,000 for the rest.

According to the Reserve Bank, the one-year mortgage rate was 4.50 per cent at that time. On a 25-year term, that means our homeowner was shelling out $841 each week in repayments.

A mortgage isn’t the only cost homeowners face. Rates, insurance and maintenance are the other big-ticket items, but the mortgage is by far the largest expense, so we’ll keep it simple and ignore the rest.

Fast forward to today, and the one-year mortgage rate is 2.29 per cent at the major banks, roughly half of what it was three years ago.

That’s important, because it means that weekly payment of $841 goes a lot further, and prospective homeowners can borrow a whole lot more.

Our fictional house has increased to $1,000,000, which means the 20 per cent deposit needs to be higher than before, at an eye-watering $200,000.

However, if one can amass that, the much larger mortgage of $800,000 is marginally cheaper to service, at $808 a week.

My point is that even though house prices have risen strongly, low interest rates have ensured that mortgages aren’t any more expensive to service.

If you can get past the deposit hurdle (which is admittedly a significant one) your weekly payment is basically unchanged from three years ago, even though house prices are up substantially.

At the same time, the average weekly rent in Auckland has increased more than 20 per cent.

For me, this goes a long way to explaining why the housing market is where it is. You could almost argue that house prices have done exactly what they should have, against this backdrop.

While many of us focus on the ever-increasing median prices, for many people the most important thing is how much they’ll have to pay each week.

When you plug your income into one of those ‘how much can I borrow?’ calculators, then change the interest rate from 4.50 per cent to 2.29, your spending firepower changes dramatically.

I’m not suggesting the housing market isn’t overheated, or that prices deserve to be as high as they are. It almost certainly is, and they probably don’t.

I’m merely pointing out something that is often overlooked, and which I suspect has had a bigger impact on the market than virtually anything else.

It also begs the question – what happens if mortgage interest rates don’t remain at these rock bottom levels forever?