House prices in Australia have quickly moved to almost overvalued but there are still a couple of states where properties are undervalued, according to economists at Moody’s Analytics.
“Eighteen months ago all states were undervalued, but rapid price appreciation, unmatched with higher incomes and rents, has pushed most states towards fair value,” says the latest quarterly Australian Housing Update.
“Australian house prices are still fairly valued at current interest rates, but worrying trends are emerging in a couple of states.”
The valuations are done using a model including today’s interest rates, which are at record lows.
If interest rates rise to more normal historical levels, Moody’s says nationwide prices start to trend towards overvalued.
And in NSW, prices have already moved from slightly undervalued to slightly overvalued.
“Were it not for the recent surge in NSW rents, house prices there would have moved further towards overvalued,” write economists Glenn Levine and Fred Gibson.
Reserve Bank governor Glenn Stevens cited the Sydney housing market as a risk in a recent speech. “Investors should take care in the Sydney market, which is the main area where a large increase in borrowing has been occurring,” he said.
And Moody’s says its modelling confirms a problem may be emerging in the NSW housing market.
In Victoria, prices continued to increase through the first half of 2014, up 2.9%, though at a slower pace than in the second half of 2013, when prices rose 9%.
Rents rose solidly through the first half of 2014, increasing ahead of inflation, but incomes have been flat.
“Victoria’s housing market is now overvalued and would be considerably overvalued were it operating in a more normal interest rate environment,” Moody’s says.
“The heady increase in construction will weigh on rents and, unless it also cools house price appreciation, will push the Victorian market deeper into overvalued territory.”
In Queensland, house prices are rising at a steady but sustainable rate.
South Australia remains the most undervalued of all the states.
Prices rose 0.8% in the first half of 2014, outpacing income growth but falling short of the rental increase.
House price appreciation has been relatively modest in Western Australia. Prices rose 3.1% year-on-year to June. Incomes are falling as the mining boom tapers, and Western Australia is one of the only states where rents are declining. Moody’s says the market looks soft but stable.
Among the smaller states, the Northern Territory stands out as trending towards overvalued. House prices are rising only slowly, but rents and incomes are virtually flat.
The ACT was the most undervalued state 12 months ago, about 22% below fair value, but is now near fair value and around the middle of the pack.
“Incomes are falling in the Australian Capital Territory and may contract further as the Federal Government’s austere 2014-2015 budget takes effect,” Moody’s says.
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