Research from UBS shows how declining interest rates in Australia have contributed to the boom in house prices.

UBS analysts George Tharenou, Scott Haslem and Jim Xu took a closer look at the current state of Australia’s housing market in a research report released on Friday.

The report shows the negative correlation between interest rates and house prices has remained broadly accurate since interest rates fell from above 10% in the mid-1990’s.

The most recent surge though, with house prices in Sydney and Melbourne doubling since March 2009, has been helped in part by consistent easing of monetary policy by the Reserve Bank of Australia.

This chart tells the story:

Since the Reserve Bank of Australia started reducing interest rates in November 2011, the benchmark cash rate has fallen to 1.5% from 4.75%.

During that span, house prices have risen from around 4.5 times to a record high of 6.5 times household income.

And that multiple doesn’t include stamp duty. UBS said that for buyers of a median-priced property in Sydney, stamp duty has increased from around 8% of income in 1995 to almost 40% in 2017.

Not surprisingly, the amount of median income needed to repay a mortgage has also risen. For a standard mortgage in the Sydney market, with principal and interest repayments where the loan/value ratio is 80%, mortgage repayments now amount to 27% of household income — the highest level since 2008.

At the same time, UBS said that the 8-year increase in house prices has seen total household wealth in Australia climb to more than 700% of household income — another record.

The wealth effect has helped to support domestic consumption despite the negative effects of higher mortgage costs.

The three analysts said that the resulting boost to household balance sheets has seen the savings rate steadily dip from above 10% after the global financial crisis to less than 5% in 2017.

However, given the low savings rate UBS highlighted concerns around the level of household debt relative to income.

With total household debt at 190% of GDP, households have “never been more sensitive to even a small rise in interest rates ahead”, the bank said.

However, given that interest rates are still so low, UBS said that mortgage repayments total around 9% of household income, which is near a 12-year low.

As David Scutt reported this morning, this week’s preliminary data from CoreLogic data shows that auction clearance rates remain steady.

However, given the recent introduction of higher rates on interest-only mortgages and stricter macro-prudential regulations on interest-only borrowing, combined with weaker consumer sentiment, the three UBS analysts forecast that house price growth will cool into 2018.

The bank predicts annual growth of 7% to the end of 2017, before price growth slows to between 0-3% next year.

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