Housing might seem affordable at first glance, but record low interest rates won't be here forever, and without them, the picture is decidedly more bleak, writes Michael Janda.

Prospective first home buyers are confronted with bipolar commentary on the market they confront.

On the one hand, they see stories of rapidly rising home prices, at least in Sydney, Melbourne and Perth, that are lifting their dreams further out of reach.

This is even more so in an environment where low rates mean their term deposits or online savings accounts (where you are likely to be getting between 2.5-4 per cent interest) are being left well behind average home price gains of almost 10 per cent last year.

Yet against this talk of surging prices and housing bubbles, another large swathe of the media talks of decade highs in housing affordability.

The most recent Housing Industry Association-Commonwealth Bank quarterly Housing Affordability Index for September showed times had not been better for buying a home since June 2002.

With home prices on the rise, deposits losing their relative value, and affordability at a decade high, surely it must be time to jump into the market?

So why then do the most recent ABS housing finance figures for November show first home buyers making up the smallest proportion of new mortgages on record? Why are new home buyers accounting for just 7.6 per cent of real estate purchases?

Perhaps it is because generations X and Y have more financial smarts than their parents give them credit for, and many of them aren't being lured into bidding against those parents (in their guise of property investor) or Chinese buyers to pay overinflated prices for a home.

In the midst of the most recent spring surge in prices, well known value investor Roger Montgomery wrote a cautionary article for would-be property investors.

Even before the past two months of continued sharp home-price growth in many of Australia's major cities, Mr Montgomery concluded that housing may be as much as 45 per cent overvalued based on current rental yields.

The obvious question then is, how can housing simultaneously be up to 45 per cent overvalued and the most affordable it has been in more than a decade?

The answer lies in what the HIA-CBA Housing Affordability Index measures, and how it measures it.

It compares the level of monthly mortgage repayments on a median-priced property purchased now with average weekly earnings. The index does so at current interest rates, which happen to now be sitting around record lows.

On CBA's figures for the median priced home of $459,000 (based on the bank's valuations of properties on its loan book) and a current interest rate of 5.18 per cent per annum, the monthly repayment is $2,458 and affordability index is 75.1 (that decade-plus high).

However, when I put in the average bank discount variable interest rate since June 2004 of 6.68 per cent (Reserve Bank figures), the monthly repayment on the same sized loan jumps to $2,836 and the affordability index to around 65.1 - slightly worse than the HIA-CBA figure for September last year, and pretty average over the past four years.

When I plug in the decade-high discount mortgage rate of 8.95 per cent seen in August 2008, the monthly repayment ratchets up to $3,453 per month and the affordability index slumps to 53.5 - the worst level since June 2010 when it was 52.5.

Over the life of a 25-year loan, it is pretty fair to assume that you will end up paying, on average, the average interest rate, not the lowest rates in decades as we have at the moment.

If anything, the average interest rate I have used here is conservative as it is: a) the discount rate offered by banks, not the standard variable (which I have used because it is what most borrowers are on); and, b) the average rate of the past decade which has generally been a relatively low-rate period historically, except for a short period before the GFC (I would have gone back two decades, but the RBA's data for discount rates only start in June 2004).

So, housing affordability over the life of a loan is likely to be pretty average at the moment, relative to very recent history.

However, there is another disparity with the HIA-CBA figures - because it is based on the relatively limited dataset of CBA's loan book, the median price in the index doesn't reflect broader home price data.

The median price in the HIA-CBA figures is $459,000 for the September quarter - according to the data in the index, median home prices have fallen from $470,600 in September 2011.

In contrast, real estate analysis firm RP Data has dwelling prices for the five largest capital cities rising 4.2 per cent over the same period, and estimates the eight capital city median home price at $540,000 as at December 2013.

If you happen to live in Australia's largest city, then price rises have been particularly extreme over the past year at 14.5 per cent.

Sydney's median priced home unit is now $557,000, and I think it is hard to argue that first home buyers should not be able to aspire to own a middle of the road unit - either a studio or one bedder near the city, or maybe a two bedroom place at least 10-15km out from the CBD.

If these home buyers can afford the $111,400 for a 20 per cent deposit, and another $20,555 for stamp duty, then they'll be borrowing $445,600 and paying $2,652 per month.

That would put the Sydney unit affordability index down at 69.7, March 2013 levels, even at record low rates.

The same mortgage to buy the median Sydney unit would need $3,060 per month in repayments assuming average long-term interest rates of 6.68 per cent - that would push the affordability index down to 60.4.

It would also mean a person on average weekly earnings would be spending half their pre-tax earnings on their mortgage - thus restricting ownership exclusively to couples and high income earners.

If you survived the barrage of numbers, the message is clear, and openly acknowledged by the HIA and CBA in their report: the only reason housing is looking affordable at the moment is record low rates.

When these low rates inevitably start rising back towards average levels, which could well begin later this year, people who bought now will no longer find the repayments so affordable.

With luck, rising interest rates may also coincide with a strengthening of the weak wages growth of late, giving people bigger incomes to offset their higher repayments.

But when rates rise, it is likely to be in response to higher inflation, and that means greater cost of living pressures than the shadows politicians have been boxing at for the last few years.

What is certain is that Australian housing isn't affordable unless you're betting the house on rates staying at record lows for decades, and that's a very risky financial move - just ask the now homeless honeymoon rate buyers in the US.

Michael Janda is the ABC's online business reporter. View his full profile here.