Australian Housing Undervalued?

July 10, 2015
Jim Demetriou

An article published in yesterday's SMH suggests Australian house prices are undervalued. The article is based on research conducted by Dr Peter Tulip, Reserve Bank senior research manager. His research finds existing price expectation as neither "unusual" nor "irrational".

Delivering the preliminary results to a forum of economists, Tulip said, " a year ago, home prices were fairly valued, today they are 30% undervalued. He goes on to suggest the change has been brought about by lower interest rates and by changes in bond prices that imply rates will remain at historical lows for a decade. This is despite housing prices rising 16.2 % in Sydney and 10.2% in Melbourne. 

Dr Tulip and his co-author, Ryan Fox, further clarify that rising prices says nothing about whether home ownership is good value compared with renting. It only relates to owning a house where it's 30% less than renting.

The research conducted takes into consideration the falling interest rates over the long term. The fall in rates has made housing more attractive relative to renting, despite house prices increasing. Comparisons were made against two identical properties, and not including national averages of rent or house prices.

The research further indicates that owning a home is more attractive now than it was 12 months ago. This is due to the level of interest rates being at an average 4.6%, discounted. Dr Tulip suggests that, more importantly it is the change in bond yields, which means rates are expected to change little for a decade. Twelve months ago, rates were expected to increase.

Posted in: Property market

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