How much house prices exceed fair value?,
Australian house prices are now more than a third overvalued, with many areas seeing worsening conditions, new analysis reveals.
However, prices are unlikely to return to fair value unless substantial new housing developments are built, experts suggest.
Nationwide, house prices are 34 percent above fair value, according to AMP chief economist Shane Oliver’s analysis of data.
This marks a five percentage point increase since March, based on Real Estate Institute of Australia data.
The research compares median house prices to average rents in capital cities, with data spanning the past four decades.
Sydney experienced the highest overvaluation, reaching 47 percent, up from 32.8 percent earlier, followed closely by Brisbane at 45 percent.
Brisbane’s overvaluation rose from 33.5 percent, while Canberra and Adelaide were overvalued by 38 percent and 33 percent, respectively.
In contrast, Perth had a lower overvaluation, sitting at just 12 percent above fair value.
Melbourne was the only capital city to show improvement, with overvaluation dropping from more than 25 percent to 17 percent.
Oliver began comparing median house prices with average rents in each capital city in December 1983, excluding Darwin and Hobart.
Despite rising rents in recent years, the gap between house prices and rents remains persistent across Australia’s capital cities.
“The results haven’t changed much compared to earlier this year,” he explained.
“Housing prices have generally increased, although inflation has slightly decreased. However, the overall picture remains one of overvaluation.”
“This is especially true for houses, which are overvalued across most markets, continuing to show a consistent trend.”
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“Sydney needs to fall by approximately 32 percent to return to fair value,” he stated.
“Perth requires a drop of about 11 percent, with other cities falling somewhere in between,” he added.
Building more homes, Oliver emphasized, will be crucial in reducing overall overvaluation and maintaining lower prices in other cities.
The research comes as the federal government attempts to address high housing costs with a shared equity scheme.
This scheme aims to boost homeownership and enable more build-to-rent developments, offering tenants increased security.
Property values have been weakening this year due to high interest rates, but remain unaffordable for many.
The typical Australian home now costs eight times the median household income, a record high.
A hypothetical first-home buyer would need to allocate more than half of their income for mortgage repayments.
Louis Christopher, managing director of SQM Research, agreed that Sydney’s housing market is overvalued.
However, he noted that this has been the case for quite some time now.
“Using our metrics, which compare house prices to nominal GDP, Sydney is the most stretched market,” he said.
“We estimate it’s overvalued by just over 20 percent, though historically, it has often been about 20 percent overvalued.”
“There were brief periods in 1994 and 1995 when it returned to fair value, but this is rare,” he added.
Cities like Adelaide and Melbourne are considered “less stretched” in terms of housing market valuations, Christopher explained.
Nonetheless, he still believed Melbourne’s values are about 15 percent too high at present.
“The long-term overvaluation in Melbourne has been around 9 percent,” he stated.
“There have been times, particularly in the early 1990s, when Melbourne was undervalued, but recently, prices have corrected.”
He noted that Adelaide’s property market offers a fair valuation, attributed to slower economic and population growth.
Additionally, a lower cost of living in Adelaide, compared to Sydney, has contributed to this balanced market.
Oliver noted a different trend in unit valuations across Australian capital cities, with overvaluation at just 5 percent.
Perth, he pointed out, is undervalued by 10 percent, while Hobart has seen nearly a 40 percent overvaluation.
“Hobart’s overvaluation stems from the pandemic housing boom, which led to inflated property prices,” he explained.
Melbourne’s performance in both houses and units has been weak, Oliver suggested, due to several factors.
“Melbourne’s slow recovery from the pandemic, higher interest rates in 2022, and modest price gains have hindered progress,” he added.
Christopher believes that property market outcomes will vary significantly between cities in the future.
“We anticipate Sydney house prices will continue to fall, but it’s unlikely the city will become undervalued soon,” he predicted.
Meanwhile, in Brisbane, he believes overvaluation will persist until the 2032 Olympic Games, further impacting the housing market.
