KEY POINTS:
The housing boom is over and from the standpoint of the average household's finances, it is about time.
Given how stretched the measures of housing affordability have become, it is remarkable that the boom has been as long and as strong as it has.
Over the past 10 years, the share of the average household's disposable income required to pay the mortgage has climbed from 9 per cent to 14 per cent. In Australia it is 12 per cent.
That may not sound like much but it is an average across all households, two-thirds of which either rent or have paid off the mortgage. The burden on the third which have mortgages is correspondingly higher.
And it is 14 per cent of the average household's combined after-tax income, not the average person's income.
Debt has been rising significantly faster than the incomes from which it is serviced.
The ratio of household debt to disposable income has risen from 90 per cent in 1997 to 160 per cent now. It is 140 per cent in Australia.
The average house price has climbed to six times the average household disposable income (Australia is 5.7 times).
"While a range of factors may have driven this," the Reserve Bank says, "some of which may not be expected to reverse, its rapid climb strongly suggests that house prices may be overvalued leading to a correction at some point."
To return the ratio to its long-run average of 3.4, incomes would have to rise by 80 per cent while house prices flatlined, or house prices would need to fall by 44 per cent.
Meanwhile, rental yields have been falling even as interest rates have been climbing.
The weighted average mortgage rate is now twice the average gross rental yield.
So why do people still buy investment properties? Look no further than the tax laws and the ability they afford to shelter income in the short term and derive untaxed capital gains longer term.
No wonder property investors have taken like a cat to water to the idea of ringfencing losses on property investment, so that they could no longer be used to shield other income from tax.
Some economists have attributed the doubling of house prices over the past six years at least in part to the increased value of that tax shelter since the Government introduced the new top tax rate of 39c in the dollar in 2000.
The Reserve Bank warns that "sustaining cash flows could become problematic if economic conditions were to weaken. Also capital gains are becoming increasingly uncertain as a means for investors to break even".
Interest rates are at an eight-year high and even if the official cash rate goes no higher in this cycle, a lot of borrowers face higher mortgage bills as fixed-rate mortgages come up for an interest rate reset - by an average of a full percentage point over the coming year, the central bank reckons.
It also notes, no doubt with some satisfaction, that there is little sign of a repeat of the mortgage wars where banks sacrificed interest margins in the contest for market share. That helped to frustrate earlier attempts by Governor Alan Bollard to cool the market.
Interest margins have increased to more "sustainable" levels over the past six months, it says, though they are still a full percentage point below their levels in the early 1990s.
In the face of these headwinds it would be little wonder if the housing market was going nowhere fast.
Pundits' confident predictions that the market was running out of steam have been wrong before, of course, but this time the statistical evidence is pretty compelling.
The Real Estate Institute's median price has been going sideways for the past six months.
Turnover on the other hand has been dropping like a stone. Sales last month were 23 per cent down on October last year.
For properties worth less than $400,000, turnover was down 30 per cent compared with a year earlier.
"This suggests the squeeze is coming most of all where cashflow is paramount - for investors and low-to-middle income households," Bank of New Zealand economist Craig Ebert said.
The average number of days it takes to sell has been creeping higher - 34 last month compared with 28 in May.
ASB's quarterly survey of housing market sentiment reflects the shift from a seller's to a buyer's market, with fewer people expecting prices to rise over the year ahead.
History suggests they are right.
If the past relationship between housing market turnover and prices holds, then house price inflation, which has been in double digits for the past five years, will have dropped to around 4 per cent by early next year.
The flattening off of house prices is likely to turn off the wealth effect, which has turbocharged consumer spending over the past few years.
The wealth effect occurs when people borrow and spend some portion of the increase in the value of an asset, notably the equity in their homes.
It may only be a few cents in the dollar of the paper gain, but past Reserve Bank research would suggest that the 15 per cent rise in house prices in the year ended June - $80 billion - explains almost 40 per cent of the increase in private consumption over the period.
Firms selling to the domestic market will miss that.
But the increase in housing wealth delivered by the boom has come at a social cost. Like other forms of inflation it creates both winners and losers.
Losers are those young couples (the single can pretty much forget it) who cannot scrape together the deposit on even a heroically geared starter property. How much more likely are they to emigrate?
Or those who do manage to get a foot on the property ladder but have to defer having children for years.
Then there are middle-aged people who face a shrinking window between getting out from under the mortgage and retirement in which to accumulate a nest egg.
Last year's census found the proportion of households with mortgages almost unchanged on 2001, at just under a third.
That tells us nothing, however, about the composition of those households and how it may have changed. It will take a lot more data and analysis for that.
One suspects, a priori, that they have got older.
