Australia has emerged as one of the world's most overvalued housing markets on the basis of a multiple key measures, as local buyers remain confident that interest rates will remain low and cash-flush foreigners from the Asia-Pacific rush to make reckless investments.

According to the latest analysis by The Economist, Australia is host to the world’s most overpriced housing markets when measured against income, with its overvaluation figure of 33 per cent the highest of all countries surveyed.

Measured against rents, Australia’s housing market is overvalued by 55 per cent overall, a figure surpassed only by Belgium, Canada, Hong Kong and New Zealand.

These figures from The Economist are substantiated by the latest raft of price information from RP Data, which indicate that median home prices rose by 4.2 per cent over the quarter to August 31, for the market’s best winter performance since 2007.

Gains were led by Sydney and Melbourne with increases of five per cent and 6.4 per cent of respectively, with the Victorian capital managing to beat Australia’s biggest city to the surprise of observers.

Gains in the capital cities over the year to August 31 are just as impressive, with Sydney rising 20.9 per cent, Melbourne 15.6 per cent, Brisbane 10.4 per cent, Adelaide 10.6 per cent, Darwin 12 per cent, Perth eight per cent, Hobart 8.4 per cent and Canberra six per cent.

Most of Australia’s capital cities now have a median price of nearly half a million, including Canberra, Darwin, Melbourne and Perth. Sydney remains the most expensive city for housing in Australian, with a median price of $650,000.

There are several likely culprits for the overheated state of Australia’s housing market. One of Australia’s leading economists Jeremy Lawson, a former adviser to Prime Minister Kevin Rudd, imputes the problem to negligent credit policy on the part of the Reserve Bank, which considers credit growth of more than six per cent acceptable.

Low interest rates are likely to persist given the latest round of moderately disappointing GDP figures, which indicate that growth in the June quarter fell compared slightly compared to the March quarter.

Another problem is a supply-demand imbalance in major markets such as Sydney, caused by a preference for housing in certain popular, long-established areas. Linda Phillip, national research manager with Propell National Valuers points out that supply is fairly inelastic around the inner city, where property is most highly coveted, due to lack of available land. This, she said, is a big part of the reason why Sydney has logged the most rapid price increases.

A third contributing factor is the influx of cash-flush investors from the Asia-Pacific, and China in particular, who are willing to overpay significantly for homes in Australia.

David Morrell, director of agency Morrell & Koren, informed a parliamentary inquiry into foreign investment in residential real estate that Chinese buyers have proved willing to pay 30 per cent more than the reserve for properties in the upmarket Melbourne suburb of Toorak. According to Morrell, many Chinese investors were looking to acquire properties without meeting residency requirements, abetted by real estate agents who covet their business.

The Middle Kingdom market for Australian housing is already enormous, with research from Asian investment group CLSA indicating that around 10 million members of the Chinese nouveau riche class have their eyes on Australia as a migration destination.