House prices in Australia could be massively overvalued, more so than in many other parts of the world, according to an analysis by one of the world’s leading economic and business publications.
Publishing its latest House Price Indicators league table, The Economist magazine has reported that central bank efforts to hold down interest rates have led to a recovery in values around the world, and that prices are now rising in 18 of 23 countries tracked and are overvalued compared with long-term averages relative to rents in 17 out of 20 countries for which data is available and to disposable income in 14 out of 20 countries.
The situation is even worse in Australia, where prices are 55 per cent overvalued against long run averages based on a ratio of house prices to rents (which measures the relative attractiveness or otherwise of housing as an investment in a similar way to the price/earnings ratio of shares) and 33 per cent overvalued based on a ratio of house prices to disposable income, which determines the affordability of owner occupied stock.
Only one country (Belgium) is more overvalued in terms of price/income ratios, while only four (Hong Kong, Canada, New Zealand and Belgium) are more overvalued in terms of price/rent ratios.
Moreover, Australian prices surged by 10.4 per cent over the past 12 months, and have risen faster than anywhere except for Hong Kong, Austria, South Africa and Switzerland since the magazine first started tracking the data in the first quarter of 2008.
The latest report comes as policy makers in Australia grapple with long term challenges associated with ensuring sufficient supply of housing to meet population requirements.
On November 27, the Senate Economics Reference Committee will hand down its report into affordable housing, after reviewing the 221 submissions it received earlier this year.
Those submissions reveal that views on the topic vary considerably. The Reserve Bank, for instance, says the concentration of the population around two large cities constrains Australia's ability to provide new housing at reasonable cost, as does the country's low urban density.
ANZ chief economist Saul Eastlake, meanwhile, described housing as an area of ‘half a century of policy failure’, and says that with the increase in stock over the 10 years to 2011 failing to keep up with the population, it was clear the nation suffered from a supply deficit – especially as an aging population, increasing numbers of family breakdowns and a long-term decline in average family sizes meant the number of dwelling units required relative to the population was on the rise.
Largely because of this, however, a number of commentators argue there is no reason to expect prices to decline in the foreseeable future.
Michael Yardney, director of wealth advisory group Chan & Naylor, for instance, argues that The Economist’s assumption that price/rent and price/income ratios should return to their long run average is overly simplistic.
“I’m not suggesting prices will keep booming – clearly they are not,” Yardney wrote recently. “But there’s no property crash on the horizon either.”
In other countries, The Economist said prices in America were finally starting to see healthy gains following a massive slump, but noted prices in China were starting to turn while those in Spain, France and Italy were still falling.