David Bassanese, the chief economist of BetaShares, has an interesting note out this morning where he argues that Australian house prices are nowhere near the levels of overvaluation the BIS claims.
Bassanese says that while on the basis of the house price-to-income ratio, prices are 30% above their average since 1986, a better measure is the period since 2003 when there has been a material, and structural, step down in interest rates in Australia. On this basis he says prices are “only 7.5% above its average since 2003”, with a broadly similar result for “the house price-to-rent ratio – as declining interest rates have facilitated a structural decline in rental yields”.
Bassanese says that mortgage affordability – which takes account of the structural step down in Australian interest rates – is a better way to judge house price valuations. On this basis he believes “there has been no obvious structural worsening in mortgage affordability over recent decades”.
Low interest rates and a level of affordability, based on repayments as a percentage of income, means “further gains in house prices are entirely possible over the next few quarters – even pushing the house price-to-income ratio to even higher cyclical peaks”.
But with that potential price rise comes a warning and Bassanese says “the further house prices continue to rise relative to incomes in the current low interest rate environment, the more they will need to underperform income growth in the years ahead”.
That’s a clear warning that further price rises will prove unsustainable.