Moody’s Investors Service says that the poor state of housing affordability in Auckland — despite a recent improvement driven by rising incomes and low interest rates — is credit negative for New Zealand covered bonds.

“Rising household incomes and record low interest rates have prevented a deterioration in housing affordability in New Zealand over the past year, including in Auckland, the country’s largest city,” says Karen Burkhardt, a Moody’s Associate Analyst.

“However, high housing prices in Auckland — which accounts for a large proportion of mortgage loans in New Zealand cover pools — mean that new home owners in the city are spending on average close to half of their monthly income on mortgage repayments, making it considerably less affordable than any other region in the country,” adds Burkhardt.

Moody’s conclusions were contained in a just-released report on New Zealand covered bonds, “Auckland Housing Affordability Remains Poor Despite Improvement”.

Moody’s sensitivity analysis to gauge the impact on housing affordability in New Zealand of changes in housing prices, interest rates and loan-to-value ratios (LTVs) further shows Auckland as the most sensitive of any region in New Zealand to any shift in these factors.

As of 31 December 2016, 49.5% of all mortgage loans included in New Zealand cover pools were on properties located in Auckland.

However, the risks posed by poor housing affordability are mitigated by the low state of the WA current LTVs of the residential mortgage loans in New Zealand cover pools.

In addition, the Reserve Bank of New Zealand (RBNZ) has imposed limits on the proportion of mortgages with high LTVs that banks can write since 2013, reducing the exposures of banks and covered bond programmes to higher-risk lending and provide a buffer in the event of declining house prices.

As indicated, although the situation in Auckland improved over the year to 31 December 2016, the cost of meeting mortgage repayments in the city remains high, owing to its high housing prices.

The median housing price in Auckland was NZD 840,000 as of December 2016, much higher than the NZD 516,000 for New Zealand overall (Source: Real Estate Institute of New Zealand), owing to rapid price increases especially over the past three years, which have been driven up by supply shortage and high levels of immigration to the city.

Across the rest of New Zealand, housing affordability improved in Canterbury, Gisborne/Hawkes Bay, Manawatu-Wanganui, Northland, Southland and Waikato/Bay of Plenty over the year to 31 December 2016, owing to a combination of rising household incomes and lower mortgage interest rates.

Housing affordability deteriorated in the Otago, Wellington, Taranaki and Nelson/Marlborough regions over the year, because of rapid housing price increases and either declines or relatively small increases in household incomes.

Source: Moodys