Wellington, Aug 18 NZPA - Falling house prices and mortgage rates mean now is the best time to buy a house in nearly a year, and it will only improve for buyers, says the monthly Roost Home Loan Affordability report.

New Zealand home loan affordability improved in July by its biggest margin in 18 months to its best levels since September last year as fixed mortgage rates dropped and house prices eased, the report said.

The report measures the affordability nationally and regionally for income earners and households, taking into account house prices, interest rates and incomes.

It said affordability was set to improve further through the second half of 2010 if house prices kept falling in a buyers' market, and further concerns about the global economy drove market interest rates lower.

Personal tax cuts from October 1 would also help.

The national median house price fell 1 percent to $349,000 in July from June and is now down 3.2 percent from a record high of $360,500 in March.

Wholesale interest rates have fallen and financial markets are now expecting the Reserve Bank's official cash rate to rise just 50 basis points in the next year to around 3.5 percent.

The average two-year mortgage rate fell to 6.98 percent in July from 7.18 percent in June and has fallen further since the end of July to around 6.75 percent.

"The combination of lower fixed mortgage rates and a buyers' market is improving affordability," Roost spokeswoman Margaret Smith said.

"Homebuyers are in a strong position in a market where house prices are flat to falling and the outlook for interest rates is more subdued," she said.

The report showed the proportion of a single median after tax income needed to service an 80 percent mortgage on a median house improved to 59.5 percent in July from 61.3 percent in June and is closer to its 57.4 percent level from July 2009.

Affordability hit its worst level of 83.4 percent in March 2008 just after house prices peaked and 2 year mortgage rates were close to 10 percent.

Affordability for the typical first-home-buyer also improved to 52 percent in July from 53.8 percent in June.

Affordability improved significantly in Queenstown, Waikato/Bay of Plenty, Hawke's Bay, Nelson, Wellington and Canterbury because house prices fell.

But affordability worsened slightly in Northland, Manawatu, Otago and Southland as house prices there rose.

Auckland is now the least affordable area in New Zealand, taking the mantle from Queenstown for the first time since January 2002.