House prices to surge 15% by late 2013 as rates fall 100 basis points: Australian Financial Review’s David Bassanese

House prices could rise by as much as 15% between now and late 2013 as rate cuts improve affordability, according to Australian Financial Review economic writer David Bassanese.

According to Bassanese, there is a “broad inverse relationship” between current mortgage repayment levels and subsequent house price gains.

“That should be no surprise, because if the required home loan repayment is relatively low, house prices (all else constant) will tend to be bid up," he says.

Bassanese, a 20-year economics veteran, expects interest rates to fall by 100 basis points over the next 12 months – taking the cash rate to 2.5%.

This, he says, will result in further reductions in mortgage rates, which are already at below-average rates, reducing monthly mortgage repayments.

And if per capita household incomes grow by around 4% at the same time as mortgage rates drop, he estimates that repayment levels would drop to 20% below their long-run average by next year – around lows last seen in mid-2009.

Bassanese has compiled his own housing affordability index dating back to 1986 based on the eight capital city established house price produced quarterly by the ABS, quarterly disposable income per capital (also compiled by the ABS) and the discounted bank variable mortgage rate compiled by the RBA.

The Bassanese index measures the mortgage repayment required as a percentage of household disposable income per capita – assuming house prices track changes in the ABS house price index

“The results suggest that as at the June quarter, the mortgage repayment as a percentage of disposable income was around 6% below the average since mid-1986.

According to Bassanese below-average mortgage rates more than offset the house prices to disposable income ratio, which is currently running at 16% above its long-run average.

He says declining mortgage rates and high affordability were the factors behind the mid-1990s property boom.

And he argues that the fact that house prices to income have remained at this high level since mid-2003 suggests this was a “sustainable one-off adjustment due to the structural drop in mortgage rates”.

“As Reserve Bank governor Glenn Stevens once remarked, if house prices are in a bubble then they been that way for an extraordinarily long time,” says Bassanese.

Bassanese's predictions of a 100-basis-point reduction in the cash rate over the next 12 months is broadly in line with the forecasts of some noted economists.

Last week Westpac chief economist Bill Evans changed his rates forecast to two consecutive 25-basis-point rate cuts in October and November and a further 25-basis-point rate cut in the March quarter.

ANZ Research is also forecasting two rate cuts in October and November with an easing bias thereafter.

A quarter of the 20 economists polled by Bloomberg on Friday expect a 25-basis-point rate cut in October.

The five are: ANZ, Westpac (Bill Evans), AMP (Shane Oliver), BT Financial (Chris Caton) and Market Economics (Stephen Koukoulas).