Interest Rates and Housing Affordability

The Herald reports that Westpac is predicting the Reserve Bank will raise the official cash rate twice in 2008. This is based on inflation breaching 3% again, in today’s announcement.

Inflation looks to be 3.5% to 4.0% in 2008 and almost as bad to stay close to or over 3% over the next three years. I think we will regret having inflation stay relatively high for so long.

The graph above shows how high interest rates are for home owners. In 1999 mortgage rates were below 7% and after four years of increases are now closer to 11% than 10%.

This combined with the rising house prices is making home ownership unaffordable for the average New Zealander. The latest RBNZ Bulletin (page 19) has the graph below:

This show, for a family on the average income, what the cost of a 90% mortgage would be for a median priced house. This is presumably using a standard 25 year mortgage.

Now during the 1990s, the cost of such a mortgage was between 30% and 40%, averaging around 35%. Since 2002 it has increased steadily and is now at a record high of almost 50%. Not many families on the average income can afford to have half their money go towards the mortgage alone.

Interestingly the Reserve Bank say that a 1% increase in housing stock leads to a 1.6% fall in real house prices. The Government really needs to look at issues such as use of land, urban boundaries and other housing supply issues. It is easier, I think, to make a change on the supply side than the demand side.