House prices may be falling, but higher interest rates mean the amount of income needed to buy a house is increasing.

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

That was nearly $7,000 above the average in November 2021, when the median house price was 8% higher, according to the Real Estate Institute of New Zealand.

Similarly, the average income of a homeowner (without investment property) who took out a mortgage in June was $182,000, about $15,000 higher than the November average.

CoreLogic’s head of research, Nick Goodall, put the increased income needed to buy homes primarily on the rise in interest rates.

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

Monthly payments for someone with a $400,000 mortgage (with a 30-year term) would have been $595 higher, at $2,196, had they been charged at the average two-year fixed rate in June compared to November.

Since higher interest rates mean it is more expensive to pay off a mortgage, banks require borrowers to have higher incomes relative to the amount of debt they are seeking.

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

Reserve Bank data shows that banks have limited lending to borrowers who are looking for a lot of debt relative to their income fairly consistently across all types of borrowers.

In June, 47% of new mortgages to first-time home buyers went to borrowers seeking debt worth more than five times their income.

This share was 41% for owner occupiers without investment property, 66% for owner occupiers with investment property and 62% for investors.

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

Changes to the Credit Agreements and Consumer Credit Act, which came into effect in December (and were watered down a bit last month), force lenders to be smarter about ensuring borrowers do not incur more debt than they can bear.

Goodall noted that banks will also be wary as the Reserve Bank pushes to put in place a framework of debt-to-income ratio restrictions this year, so that restrictions could be introduced by mid-2023. if necessary.

If used, these restrictions would limit banks’ lending to borrowers seeking debt of a certain amount above their income.

Goodall said that in an environment of rising interest rates and falling house prices, banks’ risk aversion may also extend to borrowers.