In spite of recent angst of a housing bubble, a senior Reserve Bank researcher says Australian house prices are 30 per cent undervalued – the broadest gap in thirty years.
The RBA’s Peter Tulip and his co-author, Ryan Fox, delivered their findings at the Australian Conference of Economists in Brisbane on Wednesday saying that a year ago home prices were “fairly valued,” whereas now they are about “30 per cent undervalued,” according to smh.com.au.
Tulip’s research indicated that owning a house today costs 30 per cent less than the renting alternative meaning current house buying price expectations are not “irrational” nor “unusual.”
“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,” Tulip said.
The annual costs of owning a home bought in April was found to be 2.7 per cent of its value but the annual cost of renting the same home was likely to be 3.9 per cent. These calculations were based on the transaction cost, the expected mortgage rate and the running and depreciation costs offset by expected capital gains.
Dr Tulip also said that because owned homes are normally “bigger and nicer” than rented homes, a lot of the perceived cost difference reflects a quality difference.
The change in the past year has been attributed to significantly reduced mortgage rates, the results of this year’s two interest rate cuts.
“What has changed since then is that real long-term interest rates have fallen substantially. That fall made housing more attracting relative to renting, despite the increase in prices,” Tulip told the conference.
Indications from the market is that mortgage rates will remain in the vicinity of their current lows for another decade.
