Australian house prices are 12 per cent overvalued and could climb even higher, a major investment bank warns.
Barclays Australia chief economist Kieran Davies came up with the finding using a model that compares factors including household income, mortgage rates and the ageing population. He says it is the third-largest estimated overvaluation of Australian house prices in the past 45 years.
The previous occasions were a record 22 per cent overvaluation in 2003, and a 14 per cent overvaluation in 1989. On those occasions the Reserve Bank was lifting interest rates, whereas now the central bank has cut its cash rate to a record low two per cent, Mr Davies said.
“Although the model has an explicit role for interest rates, the contrast in monetary policy between the episodes suggests to us that property prices are likely to remain overvalued and could well become even more expensive,” he wrote in a note to clients.
His report comes after a Core Logic RP Data survey found average capital city housing values rose 9.8 per cent during the 2014/15 financial year.
The rise over the past three years was 25 per cent, with Sydney prices up 42 per cent in that period. The banking watchdog launched a crackdown on risky mortgage lending in late 2014, with increased monitoring of growth in loans to property investors above 10 per cent.
Mr Davies said tougher macroprudential policies might bring prices closer to fair value, but it was unclear whether APRA’s measures had so far had much effect given the boom in property prices.
“The next step for the regulator would be to have some sort of broad capital penalty for investor loans,” he said.
Compared to other countries, property price growth in Australia has stormed ahead since the end of the global financial crisis.
Australian prices have lifted 49 per cent since then, while the International Monetary Fund has estimated world house prices have risen by just four per cent.
Mr Davies said Australian homes had appeared expensive compared to both household incomes and rents for more than a decade now.
“(But) the recent experience is unprecedented and it is not clear to us when (house prices) will correct, or even if they will fully revert to their long-term averages,” he said.