New research from two Reserve Bank officials shows Australian house prices are undervalued by 30 per cent, Fairfax has reported.
Senior Research Manager in the RBA’s Economic Research Department, Dr Peter Tulip, told the Australian Conference of Economists in Brisbane that while prices were fairly valued a year ago, they are now significantly undervalued.
This is due to historically low mortgage rates and an expectation that these rates will remain at a similar level for another decade.
According to the Fairfax report, Dr Tulip and his co-author Ryan Fox argue that rising house prices in major cities and across the country, do not affect whether buying is preferable to renting in terms of reaping the best value.
“Another way of interpreting our results is to look at the expectations underpinning current house prices,” Dr Tulip told the conference.
“Our results suggest that those expectations currently look fairly reasonable. They do not show unusual optimism, they do not show irrational exuberance.
“But this hasn’t always been the case. Just one year ago when we last published results, we found that houses were fairly valued — that is, the cost of buying was about the same as the cost of renting.
“What has changed since then is that real long-term interest rates have fallen substantially. That fall made housing more attractive relative to renting, despite the increase in prices.”
To reach their conclusions, Dr Tulip and Mr Fox compared the renting and buying prices of identical properties and worked in annual costs.
They found that the annual cost of owning a property bought in April was around 2.7 per cent of its market value, while the annual cost of renting the same home was around 3.9 per cent.
“So you can either pay 2.7 per cent of the value of the property to buy, or you can pay 3.9 per cent of the value to rent,” Dr Tulip told the conference.
“The undervaluation is 30 per cent, [which is] unusually wide, the widest in at least 30 years. I can take you back further but the data quality deteriorates the further we go back.
“Under our assumptions, owning a home is now more attractive, relative to renting, than it has been at any time in the past 30 years.”