House prices could surge as much as 25% as mortgage affordability reaches levels not seen since 2002, according to BetaShares chief economist David Bassanese.

BetaShares’ estimates are based on the median city house price, combined after-tax income for an average couple, a 10% deposit and typical mortgage rates. The data implies 26.2% of after-tax income is devoted to mortgage repayments, compared with the average since mid-2004 of 32.8%.

House prices would have to rise 25% to reduce mortgage affordability to that 32.8% average, BetaShares chief economist David Bassanese says.

“History suggests that the market will find equilibrium under these circumstances through a lift in house prices, until mortgage affordability is reduced to the long-run average,” he says.

Bassanese points to 2002 when house prices surged due to this factor. “The last time our national mortgage affordability estimate was better than this was in March 2002,” he says. “In the following two years, national house prices rose 36%.”