Why are house prices still rising?

Sure, there are some would-be home buyers who are priced out of the market, but there is another cohort that are not, and for them, the current prices are affordable.

There are existing home owners who are able to trade up and high-income earners who are not constrained by higher rates.

And given we are at the start of a falling interest rate cycle, there is a brigade of would-be first-time buyers experiencing extreme FOMO (fear of missing out). They see home prices running away again and are keen to get a foothold in the market before that happens.

And bear in mind that when rates fall people can afford to pay more.

In theory, this stretched affordability should be kicking in about now (or realistically it should have kicked in a while ago).

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But we know that more than 90 per cent of borrowers opted to retain their monthly mortgage payments at the same level when the last rate cut came through, choosing instead to pay off their borrowings more quickly. We also know that the big banks are not witnessing above-average mortgage arrears rates.

Meanwhile, much of the theory of affordability is based on averages – such as the average income relative to average prices and the relationship between them – but overlook the cultural obsession in Australia with home ownership and ignore the distortions to the market.

Chief among the distortions is the politics of home ownership, including those that enable the more financially stretched first home owners to get a foothold in the market.

We underestimate the tax policy on capital gains that encourages home ownership, and the changing immigration policies that can pervert demand.

And we overlook the intergenerational passage of wealth that allows some lucky younger buyers to rely on their Baby Boomer parents to provide them with a home deposit.

And if there are two incomes in the household, then affording the interest rate is difficult but doable.

To be fair, governments are now focusing much more attention on building the supply of housing stock, but it’s a long-term response to a more immediate problem. It won’t factor into the current interest rate-led supply/demand situation.

But economists still point to stretched affordability and buyers eventually tapping out as prices breach new levels and those left in the market begin to thin.

Let’s see how long that takes.

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