One of Australia's most prominent economists has warned that poor credit policy has left the national housing market severely overvalued.

Jeremy Lawson, global chief economist for UK fund manager Standard Life, says Australia’s housing market is overvalued by between 20 to 30 per cent, leaving the national economy in a state of heightened vulnerability should any financial shocks occur.

Lawson’s estimate is based on the assumption that housing prices grow in line with real household disposable income, as well as a new valuation model released by the Reserve Bank of Australia in July.

This claim by the former senior economist with the Reserve Bank and former adviser to Kevin Rudd would appear to be strongly vindicated by data emerging from the property industry.

Jeremy Lawson

Jeremy Lawson

According to figures from RP Data, housing prices have risen 26 per cent above their peaks prior to the Great Financial Crisis, and are currently 11.2 per cent higher over the 12 months ended August 23.

A total of 417 suburbs in Australia are currently host to average home prices in excess of $1 million, for a surge of 33 per cent in a single year.

Speaking to the Australian Financial Review, Lawson said the chief factors behind the overheated condition of Australia’s housing market are loose monetary policy and a dangerous attitude towards housing credit growth, with the RBA reaffirming its belief that increases of more than six per cent are acceptable.

Housing credit growth is now running at more than twice wage growth, lifting the household debt-to-income ratio to more than 150 per cent. This level, which is barely short of the pre-crisis peak, makes households far more vulnerable to sudden changes to incomes or interest rates.

Lawson is concerned in particular about the implications for the Australian economy of an abrupt contraction in Chinese growth, given the heavy dependence of the former on the later.

“The Australian economy is highly leveraged to a very unbalanced economy and if China experiences a sharp economic downturn, Australia’s fiscal position will deteriorate substantially,” said Lawson. “The painful choices governments will need to make t that time will make the ruckus over the May budget look like a minor skirmish.”