House prices could fall by somewhere between 18 and 32 percent by June 2023 according to modelling using the AIP’s Housing Affordability Repayments model.

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There seems to be an overwhelming consensus amongst financial institutions that house prices will fall, but dispute as to how large that fall might be.

We interrogated our housing affordability repayments model to gauge the realistic parameters of that fall.

It is important to note that these are projections not predictions. The model is not the real world and ignores other potentially salient factors like housing scarcity, population and immigration growth, rental growth, or increased town planning restrictions.”

The model looked at historical patterns, choosing the last two great resets in affordability – 2008 to 2009 and 2010 to 2013 – as precedents for what might happen.

Housing was most unaffordable in 2008 with an all-time index peak of 171.84. Over the next 9 months it improved by a third to 114.65. This was almost entirely attributable to a drop in interest rates which decreased by 40% from 9.62% to 5.76%.

Unaffordability peaked again in 2010 at 154.90 after house prices jumped by 27% and declined more slowly than in 2008 to 119.26 in 2013, a fall (improvement in affordability) of 23%. This fall was caused by a combination of modest interest rate cuts, flat-lining house prices, and increasing wages.

Affordability stayed at around that level until the 4th quarter of 2020 when affordability started to rapidly reduce.

This gives a peak to trough range of 9 months at one end to 37 months at the other.

What will supply the correction this time? It’s unlikely to be interest rates as it was in 2008. Wages will play a minor role, but house prices will have to provide most of the improvement.

The projection assumes that housing affordability proceeds by steep peaks in unaffordability, followed by more prolonged periods of relative affordability.

It also assumes that the lowest figure the index is likely to reach in the short term is around 120.

There was a step-change in affordability between the 90s and the 2000s. It’s possible we could be in the middle of another.

If affordability does not recover to the levels of most of the 2010s, then Australia will have a huge affordability crisis.

On that basis it is in the interests of all Australians, homeowners or not, for the market to steady and take a hit to prices.

Australia’s goal should be to get back to the affordability of at least the 90s when affordability was regularly twice as easy as it is today.