Debt-to-income: Aucklanders need almost $200k incomes to buy average home

Aucklanders could need a minimum $172,000 income to afford an average-priced home under new central bank rules. Photo / Fiona Goodall

Aucklanders would likely need to earn a minimum $172,000 a year to buy an average priced house under the Reserve Bank’s new debt-to-income lending rules.

That’s $12,000 more than the city’s $159,176 mean household income as calculated by analysts Infometrics.

Nationally, buying an average-priced home would likely require an income of $154,697 - or $27,000 higher than the typical Kiwi household income.

The new rules - due halfway through this year - will limit most owner-occupiers and first-home buyers to borrowing no more than six times their annual incomes.

And - while the incomes required to buy might seem high now - the rules should help keep house prices in check over the long term, Kelvin Davidson, chief economist with analyst CoreLogic, says.

House prices have typically grown 7-8 per cent each year, or almost double the 3-4 per cent growth in incomes.

The new rules should instead see house prices and incomes grow at more similar paces, Davidson said.

“This is about the Reserve Bank saying: ‘We don’t want to see another 40 per cent rise in house prices’ and about tying house prices much more closely to income over the long run’,” he said.

The rules are designed to help keep house prices in check over the long term. Photo / Fiona Goodall

Incomes of almost $200,000

The Herald made the calculations based on analyst CoreLogic’s current Auckland average house price of $1,289,768.

Home buyers putting down a 20 per cent deposit of $257,954 would thus be left needing a $1,031,814 bank loan to cover the rest of the purchase.

That loan amount divided by six leads to an annual required income of $171,969.

Under the new rules, investors can borrow a maximum of seven times their annual income, meaning they would need to earn $147,402 per-annum to get the same-sized loan.

Nationally, the average home costs $928,184, meaning the remaining loan size for those putting down a 20 per cent deposit of $185,637 would be $742,547.

Buying a home worth this much would require an income of $154,697, under the six-times income limit.

Investors would have to earn $132,598 per year.

Home buyers shouldn’t give up hope: Davidson

Despite the high limits, Davidson said there should still be opportunities for lower-income home buyers to get on the property ladder.

One option will be to buy new-build houses as these are expected to be exempt from the new rules in a bid to encourage the construction of more homes.

The Reserve Bank also wants to allow up to 20 per cent of banks’ mortgage lending to go to borrowers who don’t meet DTI rules, meaning select buyers will be able to secure bigger loans.

Those on lower incomes would also typically be looking to buy homes worth less than the average value anyway, Davidson said.

But Loan Market mortgage broker Bruce Patten said the new rules will make it harder for buyers because he believed they are a “blunt” tool.

Banks previously had more ability to be subjective when assessing borrowers by looking at their savings, cash reserves and cost of living.

“You could take 10 people, and if you individually assess them ... they could all borrow different amounts,” he said.

That leeway would be taken away under DTIs.

And while investors have the ability to secure bigger loans relative to their incomes compared with owner-occupiers, they will still be hit a lot harder by the new rules, Patten said.

Some investors have in the past been able to use a rise in the value of homes they already own as security against new loans that they take out.

However, under debt-to-income rules, they will instead have to show they have high enough incomes to borrow.

Patten said that will likely slow down the speed at which they can buy extra rental properties.

He said he knew of one investor with a large portfolio of rentals who has previously been able to borrow $18m.

Yet under DTI rules, the same investor would only be able to borrow $11m, Patten said.

New rules not expected to have immediate effect

DTI rules aren’t expected to slow house prices immediately as high interest rates had already put the brakes on the market.

Banks have been testing borrowers and refusing to give loans if they deem the person cannot afford to pay high interest rates.

However, it is when interest rates drop and repayments become more affordable - such as during the 2020-2021 boom that drove prices to record highs - that it believes DTIs will have an effect.

Patten said that banks have been only able to give out loans that are four to five times borrower incomes due to how costly it is to repay the loan with high interest.

However, when interest rates were as low as 2.5 per cent, banks were able to lend loans up to nine times incomes.

Therefore, the Reserve Bank said it wants to put in DTI restrictions now to prevent big loans being dished out during the next cycle of low interest rates.