According to a report this week from banking giant Barclays, which analysed factors such as the gap between household income and mortgage rates, Australia’s ageing population and the age of the Australian work force, houses in Australia are overvalued by 12%.
As we have long remarked, house prices have appeared expensive relative to both household incomes and rents for more than a decade now," Barclays chief economist for Australia Kieran Davies told Fairfax media outlets.
"The problem with these simple valuation measures is that the recent experience is unprecedented and it is not clear to us when they will correct, or even if they will fully revert to their long-term averages."
According to the report, Australian house prices are outstripping their global counterparts when it comes to growth.
Australian prices are almost 50% higher than they were prior to the global financial crisis, while globally house prices are 4% lower than they were pre-GFC.
"The growth in house prices is not only rapid by Australian standards, it is strong in an international context," Davies said.
While Davies and Barclays may consider house prices in Australia to be above their fair value, Ian Hosking Richards, chief executive officer of Rocket Property Group, believes prices in Australia are behaving as they should in a growth cycle.
“The market decides how much an asset is worth at any given time, not an economic theorist with some fancy statistical models,” Hosking Richards said.
“Property cycles typically exhibit a strong growth phase of around three years, with the remaining years of the doubling cycle much more subdued… I don’t think that anybody is expecting this level of growth to continue indefinitely. Eventually it will be pulled back to its long term average.”
Hosking Richards also believes there is no need for more stringent macroprudential measures to be enforced given that not all of Australia’s markets are seeing the same growth levels.
“Macroprudential measures are a very blunt instrument and tend to deliver extensive collateral damage, whilst often not achieving the specified goal,” he said
“At the moment only Sydney buyers, and some Melbourne purchasers may be paying a premium, but many other areas of the country have experienced extended periods of inactivity.
“To suggest that somewhere like Townsville is overvalued by 12% is quite ridiculous and defies common sense. Macroprudential measures would have the effect of further dampening demand in areas that are already struggling.”
