Economics/Jim O'Leary: House prices are still rising rapidly, reaching ever more dizzying levels and prompting ever more dire warnings about affordability. I recently heard no less a personage than a professor of economics utter a prediction along the lines that the time would soon come when nobody in Dublin would be able to afford a house of their own. This type of statement makes great copy, but does it make any sense?

The affordability pessimists would do well to check out a recent Quarterly National Household Survey from the CSO, which contains a wealth of data on housing.

It reveals that the majority (62 per cent) of first-time buyers of private dwellings between 1996 and 2003 face monthly mortgage repayments of less than 600, and the vast majority (82 per cent) face monthly repayments of less than 800.

These are not trivial amounts, but they hardly constitute intolerable burdens either: a monthly bill of 800 would absorb just about 22 per cent of the after tax income of a two-earner household with combined salaries of 50,000.

The CSO survey explicitly asks respondents to rate the affordability of their mortgages. The results are pleasantly surprising, if not downright cheerful. Less than than 9 per cent indicated that their repayments were "difficult to manage" and than 2 per cent described their repayments as "very difficult to manage".

Over 75 per cent of respondents said that their mortgage repayments were either "easy to manage" or "manageable". The only region of the country where acute affordability problems were registered at all was Dublin, where about 3 per cent indicated that their mortgages were "very difficult to manage".

Many people have great difficulty understanding how it is that spiralling house prices have not caused widespread problems with affordability. Actually, it would be more productive to think in terms of the reverse sequence: affordability drives house prices, not the other way around.

A large part of the reason for the rapid escalation in Irish house prices in recent years is that houses have become more affordable and, despite the astonishing levels to which prices have now risen, they continue to rise because they continue to be affordable. Put another way, house prices would not be at their present levels if they were not affordable.

One possible objection to this line of argument is that the first-time buyers who have successfully entered the housing market in recent times represent a declining proportion of those who would like to buy their first home, and that an increasing proportion of would-be first-time buyers are being forced to rent.

Well, the CSO data do not offer much support for this perception. Last year, according to the survey, the proportion of households living in owner-occupied housing was 75.4 per cent. In 1998, it was 77.8 per cent.

Given the sampling errors involved, the difference is probably not statistically significant. Moreover, the proportion of households living in rented accommodation is given as 16.2 per cent in both years.

Why are house prices still affordable even though they have risen so rapidly? The answer is two things: interest rates and incomes. Interest rates are at historically low levels. Housing finance can currently be obtained at a cost of less than 6 per thousand per month. In concrete terms, this means that a monthly outlay of, say, €1000 will service a mortgage of 170,000 whereas in 1998, for example, the same monthly outlay would service a mortgage equivalent to just 130,000.

If nothing else had changed in the intervening period, this would mean that today's households could afford to take out mortgages about 30 per cent bigger than the households of six years ago.

But of course, there has been another big change in the meantime: incomes have grown enormously. Average nationwide household disposable income will be something of the order of 50 per cent higher this year than in 1998. This means that the average 2004 household can cope with correspondingly higher mortgage repayments.

The combined effect of this and cheaper mortgages means that the average 2004 household can afford a very much bigger mortgage than its 1998 counterpart. How much bigger? Well, if mortgage repayments are to absorb the same proportion of disposable income now as in 1998, the answer is about twice as big.

And, what this means is that, if loan-to-value ratios are broadly constant over time, the average household can afford to pay about twice as much for a house today as in 1998. Incidentally, this is pretty well what has happened: on average, new house prices in 2004 will be about twice their 1998 level.

In fact, this way of looking at things understates how favourably the affordability parameters have moved. Affordability is not best measured by the percentage of disposable income that is absorbed by mortgage repayments, but by the absolute amount of disposable income a household is left with after making its mortgage repayments.

Take a 1998 household with disposable (after tax) income of around € 2,350 per month and monthly mortgage repayments of € 700. Take a 2004 household with disposable income about 50 per cent higher, i.e. around 3,500 per month and a similar proportion (30 per cent) of income absorbed by mortgage repayments, that is about 1,050 per month.

The 1998 household would have had 1,650 per month left after taking care of the mortgage; the 2004 household has €2,450 left, almost 50 per cent more in money terms, or about 25 per cent more in inflation-adjusted terms. The 2004 household is better off and under less financial pressure from its mortgage obligations.

None of the above is to deny that affordability is currently a serious issue for some groups, or that there are circumstances (sharply rising interest rates and increasing unemployment) in which it might become a more generalised problem. Nor is it to deny that housing affordability for some has come at a cost in terms of living in far-flung, poorly-serviced locations that require long commuting times.

But even on this score, the lurid pictures painted by the more dismal commentators are quite unrepresentative, according to the CSO survey. It reports that less than 10 per cent of recent first-time buyer households regard their dwellings as unsuitable in terms of distance from work, and less than 6 per cent perceive them to be unsuitable in terms of the availability of local services.

Jim O'Leary currently lectures in economics at NUI-Maynooth. He can be contacted at jim.oleary@may.ie