Source : the age
Houses are overvalued by 38 per cent across Australia’s capital cities, new analysis reveals, suggesting prices could have further to fall in the market downturn.
The data, from AMP chief economist Shane Oliver, indicates median house prices in every capital city are overvalued by at least a quarter, when compared to average rents – adjusted for inflation – over the past 40 years.
Sydney houses are overvalued by 41 per cent and Melbourne 24 per cent. But Brisbane – where house values increased by 10.3 per cent in just the year to the end of August, according to Cotality – is the most overvalued capital, at 61 per cent. Perth houses are 28 per cent overvalued.
Oliver has been calculating the metric as a way to analyse the market since 1983, and said the index is similar to the price-to-earnings (P/E) ratio used to value companies on the stock market.
“It’s not a perfect comparison … it’s not saying [prices are] about to fall 38 per cent,” Oliver said.
“But what it is telling us is that property is still very overvalued in Australia compared to where it would normally sit in terms of price-to-rent ratios,” he said, indicating some cities are more vulnerable than others in the current downturn.
AMP forecasts house prices will fall by about 10 per cent from their peak, but Oliver notes that others have predicted deeper declines, which has added “a fear element” for owners. ANZ forecasts a 14.5 per cent peak-to-trough fall for Sydney and a 12.8 per cent fall for Melbourne.
Oliver was wary about using the measure as an indication that the property market was set for a steep decline, noting there have been many times in the past two decades – particularly during the global financial crisis and early COVID lockdowns – when local and international media have used similar analyses to predict an imminent property market bust.
Angie Zigomanis, Quantify Strategic Insights’ head of data and insights, said while the initial COVID shock six years ago led to fears of property price falls, instead, a wave of interstate migration had pushed Brisbane house prices higher.
“You’ve had a post-COVID jobs boom and shift, and a lot of migration up there,” he said, noting that those moving to Brisbane, working remotely or in satellite offices, likely brought higher incomes with them, which was having an inflationary effect on property prices.
He argued there was a ceiling to this growth that the smaller capitals would have to hit soon, given the rate at which house prices were outpacing wage growth – even if supply remained tight.
“Melbourne and Sydney hit that ceiling earlier,” he said. “We are at a point where all of [the capitals] are fairly expensive now, and probably positioned for some sort of correction.”
Oliver noted that the data does show that in most cities, units are much less overvalued than houses – with Melbourne slightly undervalued.
“You could argue that despite the more onerous rules around investors in Victoria, there’s still value there compared to the other cities, which are just too expensive for investors to consider,” he said, noting that the change of premier, and a potential change of government in November, could make the investment worth the additional risk and costs at present.
Zigomanis wasn’t so sure.
He said the unit market in Sydney and Melbourne, both essentially fairly valued on Oliver’s index, had a greater proportion of apartments than cities such as Adelaide or Brisbane, where there are more townhouses and villas, which could mean “paying a bomb” in owners corporation and other associated fees – which could drain what might look like a significant rental yield on paper.
Zigomanis thought the impacts of the changes to negative gearing and capital gains tax also meant investing in units in Melbourne and Sydney was looking less attractive, even if they were less vulnerable to downturns.
“A buyer doesn’t get a negative gearing benefit, and therefore will require a higher rental income to offset that,” Zigomanis said.
“Maybe they were fairly valued six months ago, but they’re not necessarily fairly valued now because prices need to reflect that changing environment.”
Oliver said changes to policy, in the midst of inflation and the threat of further rate hikes, were showing the difficult balance of trying to make house prices more affordable while avoiding the impact that a total correction, of the kind reflected in the index, would have on the wider economy.
“In an ideal world, a good outcome from a housing affordability point of view would be a 10 per cent fall out to the middle of next year,” he said.
“Then a lengthy period where house price growth is less than wages growth. And then you’d gradually adjust to more affordable housing.”
