Australia’s exceptional house price appreciation over the past two years has caused in gross property overvaluation in some areas of the nation.
According to a recent report by CoreLogic and Moody’s Analytics, nationwide house prices are 5.9 per cent overvalued in February 2016, relative to fundamental values.
The biggest driver of this overvaluation is the housing market in Melbourne, which is more than 23 per cent above the Moody’s Analytics estimate of fundamental value.
House values in Melbourne have appreciated far beyond what income and rental growth suggest is appropriate, which underlines the forecast that Melbourne’s housing market is set for a period of near-stagnation while incomes, rents, and the employment market catch up with actual housing values.
House prices in Sydney are closer to fair value than Melbourne’s, although they are still 9.5 per cent overvalued in aggregate – this smaller estimate of overvaluation is the result of Sydney’s stronger employment market.
Expectations of stronger fundamental drivers can mitigate current over- or undervaluation.
For example, although the ACT housing market is considered 14% overvalued based on current fundamentals, expectations that incomes will rise based on freer government spending mean that fundamental values are expected to catch up to current values.
Australian property - over/undervaluation
Slowdown in sight
Despite the record data, Moody’s Analytics and CorLogic forecast that home value growth will likely slow across Australia during 2016, underpinned by slower income growth across the country.
“On the outlook for the housing market nationally, we expect house price appreciation to slow in 2016,” said Alaistair Chan, a Sydney-based economist based at Moody’s Analytics.
“Our forecast reflects lower income growth as the Australian economy transitions away from mining-related investment, as well as the strong build-up of housing supply over the past two years.”
“Nevertheless, accommodative policy, robust rental growth, and a recovering labour market are expected to support valuations over the medium term,” he adds.
Regionally, Sydney’s housing market is expected to rebound by late 2016, while Melbourne’s market is expected to go through an extended period of sluggishness.
Mining regions, including Perth, the rest of Western Australia and Darwin, are likely to have downbeat results over the near-to-medium term.
No price declines are expected in Adelaide, although price growth will underperform the rest of the country for the near to medium term.
“Conditions in Melbourne are again expected to outperform Sydney this year, with values forecast to rise by 7.2 per cent in 2016, before slipping back to just 1.3 per cent growth in 2017,” said CoreLogic research director Tim Lawless.
While the pace of house price appreciation is forecast to slow in Sydney, Melbourne and Darwin this year, there is expected to be some pick-up in growth in the remaining capital cities.
Hobart, in particular, stands out for better price growth.