Australian house prices 30 per cent undervalued

According to research conducted by the Reserve Bank, house prices in Australia are actually 30 per cent undervalued. This is the widest gap seen in thirty years and means that buying a property is actually much more affordable compared to renting a property.

Reserve senior research manager Peter Tulip stated that although a year ago home prices were “fairly valued”, today they are about “30 per cent undervalued”.

So what has caused Australian house prices to be 30 per cent undervalued, especially as the median house price in Sydney is now touching $1 million, making buying a home in Sydney unaffordable for many, especially first home buyers?

One of the main reasons for this 30 per cent home undervaluation is due to the lower mortgage rates available right now. Interest rates are currently at an all time low sitting at 2.0 per cent, and lower mortgage rates are expected to remain in place for another 10 years.

However, whilst mortgage rates have fallen to an all-time low, house prices in Sydney and Melbourne have both surged in value above the national capital average of 9.8 per cent. Over the past 12 months, Sydney has seen house prices rise by 16.2 per cent, whilst Melbourne has seen a 10.2 per cent rise.

Even though house prices have been rising, this has nothing to do with whether home ownership is good value compared to renting, according to Dr Tulip and Ryan Fox, his co-author.

Dr Tulip stated that "We find that owning a house costs 30 per cent less than renting". He also goes on to add, "That is, houses are 30 per cent undervalued. Another way of interpreting our results is to look at the expectations underpinning current house prices.”

Research from one year ago shows that houses were fairly valued which meant that buying a house worked out pretty much the same cost as renting a house. More recently though, the fall in interest rates has made housing much more attractive compared to renting, even though the house prices have been rising.

This research was based on comparing the cost of renting and buying identical properties, whilst avoiding comparing national average rents with national average prices. Owned homes are typically larger and of a higher quality compared to rented homes, so much of the price difference is due to a difference in quality.

To work out the costs, they calculated the annual costs of a purchased home which include costs such as the purchase price, the transaction cost, the expected mortgage rate as well as the running and depreciation costs offset by expected capital gains. The results showed that the annual cost of owning a home which had been bought in April 2015 was likely to be 2.7 per cent of its value. Compare this with the annual cost of renting the same home, which increased to 3.9 per cent.

This difference works out at 30 per cent meaning that under this research, owning a home is actually much more attractive compared to renting, and this is the widest gap experienced in 30 years.

The two interest cuts that have occurred this year have a part to play in this, as it has lowered the mortgage rate to approximately 4.6 per cent. However, Dr Tulip highlights that the change in bond yields is an even more important factor, as the market is expected to see little change in interest rates for a decade. In comparison, 12 months ago, the market had expected to see interest rates to increase.

So, according to this research, now is the perfect time to buy a property if you are thinking about getting your foot in the market. Sydney might be booming right now, but if you are open to buying a property interstate then all eyes are turning towards Brisbane, which is the most affordable capital city compared to Sydney and Melbourne.

You can also take the approach of buying a property as an investment in a high growth area and continue to rent in your preferred location, which you might not actually be able to afford to buy a property in, but renting is still reasonable.

With mortgage rates and interest rates at an all-time low, there’s never been a better time to have a mortgage and to own a home. However, those interested in buying a property should still take the time to do their research properly and work out what they can actually afford by seeing a Mortgage Broker, in case interest rates do rapidly rise.

However, as a property should be a long term investment and should be held for at least 10 years as this is the expected timeframe for properties to double in value, the research by Dr Tulip is suggesting that interest rates and mortgages are not set to rise for a decade.

To learn more about buying a new property or how you can buy a property and still rent another, our expert Property Consultants are here to help. Why not give them a call today on 1300 123 463 and they will be able to point you in the right direction of what properties will suit you best.
Published on 22nd of September 2015 by Marty Stanowich
Marty Stanowich
Marty Stanowich

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