House prices are grossly overvalued, by as much as $90,000 on average and prices could stay flat for five years, according to Westpac Bank economists. The house price boom is over and a long-expected housing market downturn is under way, they say.
But a strong economy, unemployment at a 20-year low, high job security and growing wages meant there was not likely to be a big fall in house prices. National median house prices have not moved for the past seven months, stopping dead in April after rising about $8000 a month earlier in the year. Prices are expected to "wallow" a few points either side of zero and in five years prices will be much the same as they are today, Westpac forecasts. Prices were flat for four years till 2001.
This year the market was hit by rising fixed-term interest rates and there is no relief in sight. Mortgage rates were expected to move even higher next year, putting even more pressure on the market.
For investors, rents are averaging just 4 per cent of a property's value while interest rates are about 9 per cent, making property less attractive.
On Westpac's "investor value" of housing measure, the average home is worth about $260,000, slumping from $328,000 at the end of last year. The investor value of property has been dragged down sharply by rising interest rates. That value is based on interest rates, marginal tax rates, rents and expected capital gains. While the value to investors has fallen sharply, the median price rose to about $350,000 earlier this year but has stagnated since then.
Westpac stressed that the investor value was not a price forecast. "We are not saying the median house price will fall to $260,000," Westpac's latest market report said. But that value would exert slow and steady pressure on the market price, so the overvaluation could persist for many years. The big jump in interest rates has also made housing much less affordable this year.
The cost of servicing an 80 per cent mortgage on a median home, based on a five-year fixed mortgage rate, has risen from 34 per cent of average household disposable income to 39 per cent this year. The historical average is just 25 per cent of the average household disposable income.
If house prices remained steady, it would take eight years before affordability returned to normal levels, based on incomes rising 5 per cent a year. If house prices stagnated or fell slightly, it would take four or five years for house prices to come back into line with the return from rents for investors.
