Houses are now the most affordable they have been in 18 months.
Falling interest rates have improved housing affordability in July to its best level since February 2007, the Wizard Home Loans Affordability report shows.
The national median house price was steady in July, but prices are falling in most of the big cities.
Tax cuts on October 1 and further falls in interest rates are expected to improve affordability significantly over the rest of 2008 and through the spring when many home sellers put their houses on the market.
This monthly report measures the proportion of a median after tax income needed in each part of New Zealand to service an 80 per cent mortgage on the median house price in that region.
The home loans affordability report shows it took 77.4 per cent of the median take-home pay to service the mortgage on the median house in July, down from 78.3 per cent in June and down from a peak of 83.8 per cent in November last year.
The report also shows the proportion required for a first home buyer (someone aged 25-29 that has saved 20 per cent of their after tax income in the previous five years) buying a cheaper house (first quartile price).
The first home buyer's affordability ratio improved to 66.8 per cent in July from 68.1 per cent in June and is also back at its best levels since February 2007.
Affordability looks set to improve through the rest of 2008 as interest rates fall at the same time as house prices keep falling. Tax cuts due from October 1 are also expected to improve affordability ratios as take-home pay rises slightly for most home-buyers. Nominal wages are also rising relatively fast.
"This coming spring will be the best for home loan affordability in two years," said John Grant of Wizard Home Loans.
"Home buyers are in a much stronger position than they have been for a long time. It is a buyer's market and falling interest rates, rising wages and lower tax rates are all working in favour of home buyers as we head back into summer," Grant said.
However, housing affordability remains much worse than before the housing boom took off in late 2003 and before interest rates rose from under 7 per cent in 2003 to over 9 per cent in 2008. House prices rose 64 per cent between November 2003 and November 2007. In July 2003 the affordability ratio stood at 43.9 per cent.
Most home-buyers are still forced to pool around two median incomes to afford the mortgage on the median house.
The biggest driver in the improvement in July was a fall in the average two year fixed mortgage rate to 9.09 per cent from 9.21 per cent in June.
Interest rates have fallen over the last four months as news of an economic slowdown has intensified.
The Reserve Bank of New Zealand cut the official cash rate from 8.25 per cent to 8 per cent on July 24 and is widely expected to cut it by a further 75 basis points to 7.25 per cent by the end of 2008.
The median house price was flat at NZ$340,000 in July from June and remains down 3.4 per cent from the peak in house prices in November last year.
The biggest improvements in home loan affordability were in Auckland and Southland where house prices fell sharply.
Four out of the 12 regions posted improvements in affordability, including Auckland, Southland, Canterbury and Nelson. Affordability worsened in Northland, Waikato, Hawkes Bay, Manawatu, Taranaki and Central Otago as house price rises were more than enough to offset the benefits of lower interest rates.
Affordability in Wellington was unchanged.
Affordability is now back near the levels it was at in February last year and not far off its levels of 70 per cent seen in the spring of 2006.