House prices set to rise by 25 per cent, economist hints

As at the June quarter, the estimated median national house price was $700,000, average after-tax income around $135,000 – with the prevailing relevant mortgage rate for new loans (at present) around 2.9 per cent.

That implies that 26.2 per cent of after-tax income would have to be devoted to meeting mortgage repayments on a 25-year loan, compared with an average since mid-2004 of 32.8 per cent.

Based on current interest rates, national house prices would have to rise by 25 per cent from June quarter levels to reduce mortgage affordability to the average level since mid-2004, BetaShares chief economist David Bassanese said.

For affordability to be reduced to the recent lows in 2010 and 2017, house prices would have to rise by 35 per cent.

“History suggests that the way the market will find equilibrium under these circumstances is through a lift in house prices, until mortgage affordability for the marginal buyer is reduced to at least the long-run average – if not pushed to previous trough levels if a bubble mentality develops,” Mr Bassanese said.

The economist points to 2002 when house prices surged due to affordability.

“The last time our national mortgage affordability estimate was better than this was in March 2002. In the following two years, national house prices rose 36 per cent. What we know from history is that when mortgage rates drop, new home buyers don’t just pocket the savings – they simply bid more for properties as their affordability limit has improved,” the economist said.

The economist also said that the RBA’s comments around not lifting interest rates for up to three years or until they reach the 2 to 3 per cent inflation target band is also likely to spur on the housing market.