The impact of lower interest rates

May 21st, 2012 at 7:00 am by David Farrar

The Herald reported:

John Key has defended a decision to cancel sales of affordable housing in an Auckland development, saying low are making it easier for first-time buyers and people on low incomes to afford their own homes.

So how much of an impact do lower interest rates make? Quite a lot as you will see. The caution is that interest rates vary over the life of a mortgage, but they have been low for some time now.

The average house prices at present in NZ are $397,905 nationwide, $443,070 in Wellington and $523,518 in Auckland. Now if we assume a 10% deposit and a 20 year term mortgage, what does 5% mortgage rates mean compared to 8%.

  • NZ – $632 a month lower mortgage payments, saving $151,684 over 20 years
  • Wellington - $704 a month lower mortgage payments, saving $168,901 over 20 years
  • Auckland - $832 a month lower mortgage payments, saving $199,569 over 20 years

Alternatively if one kept the repayments the same, then the savings are even greater:

  • NZ – mortgage paid off six years earlier, saving $222,199
  • Wellington - mortgage paid off six years earlier, saving $247,424
  • Auckland - mortgage paid off six years earlier, saving $292,383

So if you have a mortgage for 90% of the median house value in Auckland, a 1% reduction in interest rates gives you around $60 a week more in the hand.

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22 Responses to “The impact of lower interest rates”

  1. MajorBloodnok (361 comments) says:

    The next question is: what is the minimum salary needed to afford such a house?

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  2. burt (7,085 comments) says:

    So if you have a mortgage for 90% of the median house value in Auckland, a 1% reduction in interest rates gives you around $60 a week more in the hand.

    So… The Labour way would be to pump the poor quality spending and increase inflation pushing up interest rates by about 3% then give an additional $120/week to families via middle class welfare…. This National party have no idea how to entrench the requirement to vote for them like the lefties do.

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  3. swan (651 comments) says:

    Of course it is a nonsense response by Key. They (I hope) are not cancelling the affordable homes at Hobsonville because of low interest rates. They are doing it (I hope) because a few token affordable houses in a new development does nothing address the key issues for affordability. That is zoning controls, the MUL, and NIMBYism.

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  4. Colville (1,774 comments) says:

    IMHO just relaxing zoning will do sfa to assist affordability. Land of the fringe of the city (whichever city you look at) tends to be taken up by expensive “lifestyle” blocks with vast houses on them. The /M2 cost to buy up any cohesive block of land is prohibitive and then there is plan changes etc to go thru.
    Councils either need to enter the market and buy landbanks and then shape the District Plans (roading plans and infrastructue) around these landbanks OR zone vast tracts of land with “future residential” tags and prohibit any building of subdivision on that land that would be detremental to the future aim of Council.
    The free market will never achieve cheap land.

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  5. tvb (3,941 comments) says:

    The 20 year calculations are pure nonsense as interest rates could go up. What then??? But savings over 12 months probably do have some meaning.

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  6. PaulL (5,775 comments) says:

    This particular post is a rather poor defence. Yes, interest rates are lower and yes that helps. But it doesn’t particularly help first home buyers – the main issue for them is assembling a deposit, not the ongoing payments.

    I would much prefer Key had just come out and given the real reason – all these “low cost houses” do is transfer wealth from property developers to those lucky enough to get these houses, who then have the ability to sell them on for more than they paid for them (all the houses in the neighbourhood are worth more).

    The reality is that if you want a low cost house you need to have very little land. The problem is th ecost of the land, not the cost of the house itself. That means you need an apartment (which has no land), or a very small section.

    And Colville, the free market can deliver cheap land, and does in many places in the USA. You might not like the way they do it over there, but it is indisputable that it delivers cheap land.

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  7. trout (865 comments) says:

    First home buyer purchases have been stimulated by Kiwisaver, which enables compulsory savings (inc. subsidy) to be used as a deposit. So much for directing savings away from property.

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  8. Colville (1,774 comments) says:

    PaulL, I play the land game here Paul not in USA, first home buyers here are not too interestested in what they can get a section for in Oregon are they?
    and the difference in a 500m2 section compared to a 650m2 section is fuckall in cost (assuming reasonable base land price) but the diffrenece in the finished product is staggering.
    Cost of “land” for appartments is still quite high, you are in effect building the “land” with concrete. Parking spaces need to be built, parks and roads still need land adjacent to highrise housing.
    The cost of 2nd storey building is 140% of ground floor, 3rd storey is 170% of ground.

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  9. swan (651 comments) says:

    Colville,

    So you think the MUL doesnt affect section prices? If anyone who owned land around the fringe of auckland could subdivide to their hearts content, this would not make any difference to section prices?

    And you are saying NIMBYism and zoning controls has nothing to do with the supply/cost of apartments in Auckland? Have you seen letters to the editor in the local rags when a developer even thinks about building apartments? I know of several attempted developments in my local area (Birkenhead) thay have been halted by the council/ NIMBYs. And I have no reason to believe the pattern isnt the same across Auckland.

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  10. adze (1,695 comments) says:

    The problem with low interest rates is that it lifts demand for existing stock; house prices are inflated further, thus making them just as unaffordable.

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  11. PaulL (5,775 comments) says:

    Colville, if you’re going to assert that changes in supply of land have no impact on the cost of land (against most economic theory), then you’d need to explain why it seems to work in the USA but cannot work here.

    The reason that smaller sections don’t have much difference in price is that a substantial portion of the price is fixed – it’s council charges that are per-residence not per-sqm. The reality is that a large part of the price of land is driven by government policy. Fixing government policy has to be part of the resolution of that problem, alternatively first home buyers / low cost housing must involve small amounts of land.

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  12. Lucia Maria (1,988 comments) says:

    I’m still waiting for the variable rates to go down.

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  13. emmess (1,333 comments) says:

    The problem with low interest rates is that it lifts demand for existing stock; house prices are inflated further, thus making them just as unaffordable.

    Not at all.
    We could have a left wing government pumping up the economy with debt and deficit spending causing higher interest rates, pushing down house prices which could be just as or if not more unaffordable.

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  14. dubya (200 comments) says:

    I’ve had a drive through of the Hobsonville development; there is relatively high density terraced housing being built already, if that’s not ‘affordable’ style housing, then what is? Same with the Rockfields subdivision at Mount Wellington, lots of attached units going in there. I’m not too sure what constitutes ‘low cost’ housing! Surely terraced housing is making better use of available land, with land being the biggest cost when you’re building a new home, and is thusly affordable?

    Paul L makes the very good point that it’s council fixed charges that drive up the cost of any new build. Reduce them for smaller sections, and give a discount for using a party wall/ building multi-residence developments. NZ has built some great multi-unit developments, particularly in the 1970s- Think Pitarua Court in Thorndon, various Peter Beaven and Warren & Mahoney developments in Chch, and there’s some great Claude Megson designed townhouses in Auckland (Most of these are worth a fortune now, mind!). The small, ‘affordable’ shit we build now is mind-numbingly dull, and lacks appeal for owner-occupiers.

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  15. Colville (1,774 comments) says:

    swan. small ad hoc development will do nothing to lower prices, even a small fringe farm of 100 acres is only 500 houses. Where are the land blocks the size of Dannemora coming from?

    you cant call nimbyism on someone who doesnt want a 8 storey block of slum flats built next door unless they knew of plans prior to purchase. the district plans need to be changed to signal ability to build well in advance so that people can make informed purchase.

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  16. swan (651 comments) says:

    “swan. small ad hoc development will do nothing to lower prices, even a small fringe farm of 100 acres is only 500 houses. Where are the land blocks the size of Dannemora coming from?”

    I agree that smaller land blocks will mean things are less efficient (though still a heck of a lot better than no zoning at all). However, if all blocks are zoned appropriately, what is to stop developers from amalgamating bocks?

    “you cant call nimbyism on someone who doesnt want a 8 storey block of slum flats built next door unless they knew of plans prior to purchase. the district plans need to be changed to signal ability to build well in advance so that people can make informed purchase”

    Thats a straw-man, noone is talking about slums. However I agree you have a point about NEXT DOOR neighbours. I believe ther should be compensatory mechanisms for shading of properties. However, actual externalities by next door neighbours is one thing. Generally “not liking the idea” of development in an area is quite another. i.e. people not wanting a particular development in their suburb. That is NIMBYism and is rampant in Auckland. Take for example the proposed development of Milford Mall. Hardly anyone actually neighbours the property. But you have all these people talking about the “character of the village” and bullshit like that. Thats NIMBYism to a tee.

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  17. adze (1,695 comments) says:

    Emmess;
    “Not at all.”

    Because…? Bearing in mind no-one said anything about a left wing government being the answer.

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  18. Joseph Carpenter (210 comments) says:

    How affordable were these “affordable” homes at Hobsonville anyway? The answer is not very: typically $460,000 for 90sqm 2-storey 2-bedroom townhouse on tiny 210sqm sections. The only reason they were affordable is because the Government was giving out Gateway loans for the typ. $190,000 section cost (= the Government owns the land and mortgage, defers payment for the first five years and then charges the full amount included the deferred interest plus a penalty premium interest rate). It’s going to be real interesting in 2016 when these Gateways kick in, only the government would be so stupid after the GFC and subprime mortgage crisis to start giving out NINJA/ARM/IC loans, perhaps Mr key is wise because he knows these are idiocy and don’t actually address the problem.

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  19. Colville (1,774 comments) says:

    swan, its not strawman to call something that is built to be both budget and high density a slum, because that is what it will become a few years after being built.
    Many first home buyers subdivisions look appaling a few years after initial selldown, it only takes one in ten of the houses to go bad to drag it down. Much much worse in a highrise when a P cook or a gang moves into your level (in a rental).

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  20. PaulL (5,775 comments) says:

    Colville: so you don’t think we should have low cost housing – as they all turn into slums – or you think we should have them, but just not in your neighbourhood? I’m just trying to make sense of this all.

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  21. slijmbal (1,133 comments) says:

    Grew up in the UK during the huge increase in council housing mainly done during Harold Wilson’s leadership. It was truly enormous – something like 1/2 of new housing over a 4 year period was government built. We are talking something like a million houses I seem to remember. End result – centres for crime. It was cheap rentals not ownership.

    Maggie Thatcher tried to address it by selling off council housing in the theory that the moment the tenants owned the properties they cared about it. Crime dropped off significantly in areas where this policy was paramount. However, it partially happened by less well off taking the windfall, selling the property and the area becoming more upmarket. Something like 1/2 the tenants who bought stayed. Though there was a pretty good wealth transfer for the rest. Plenty of friends, relatives and friends’ relatives who I personally know found themselves sitting on high value properties. Accidental welfare almost.

    I worry about low cost housing if that means crap quality or hidden wealth transfer. Crap quality leads to s**t housing and all the consequences – saw it in Kirkby, Liverpool – crime, single parent families, drugs etc at levels in the late 70s that NZ has never hit yet. The wealth transfer is not really targeted in an equitable fashion.

    I also saw the consequences of tower block type flats and similar in the UK. Generally, these were seen as shite for a raft of reasons. They were generally built cheaply and badly designed and it showed.

    In the UK and NL – flats were cheaper than houses, which implies that the underlying costs are less. However, NL and London had the concept of quality apartments. Places one would actually want to live in. Much of the current apartment market in Auckland is pretty crap as they’re still working out how to do it.

    What am I saying? It’s complicated. Performing large amounts of wealth transfer in what is basically luck driven process as we cannot afford to do it to all is not equitable and unfair to those who generate the wealth as they will have to pay for it. Truly cheap housing will lead to problems if the cheapness is a reduction in quality – we need to find ways to build reasonable quality housing that is cheaper. Not as easy as it sounds.

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  22. Lee C (4,516 comments) says:

    Give me strength! when we are asked to be ‘austere’ it’s because the ‘global downturn’ has our poor government held hostage, but when the appear to be improving suddenly fiscal policy leaps into (in)action and DPF infers it is evidence of a competent government’s handling of the purse strings. and we should be grateful to them for the money we suddenly and quite accidentally find in our own pockets. Because it was nothing to do with anything the government did. . .

    What exactly are we employing these dimwits for? it doesn’t appear to be for being seen to invest in its own economy, unless you count short-sighted ‘tightening’ of the budget as such, I’d opine.

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