ARE HOUSES OVERPRICED AND ARE THEY GOING TO CRASH?

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ARE HOUSES OVERPRICED AND ARE THEY GOING TO CRASH?

 

Often when commentators use “Income” to “Property price” ratios and compare our property prices with other countries or even different periods in Australia and conclude that property prices are either over valued or undervalued, they are using the wrong statistics. 

 

For example we are currently being told that property prices when compared to our Income levels make property prices unaffordable and therefore there will be a correction soon. 

 

We hear this especially from overseas commentators visiting Australian shores. 

 

Harry Dent and Robert Kiyosaki are two such visitors to our shores recently who have said our property prices are overvalued when compared to our income levels. 

 

If you simply measured those two statistics against each other then one could arrive at that conclusion. 

 

However affordability is a function of house prices, income and interest rates. It’s not simply between income and property prices. 

 

If you look at the graph below from BofA Merrill Lynch Global Research which compares: 

 

1. Implied Price based on Income Growth 

2. Implied Price based on Income Growth and Interest Rates 

 'Fair value' of dwellings

 

As you can see from the graph the red line is a lot below the blue line indicating that property prices are hugely overpriced and most commentators use this line to run their argument that property prices as a ratio of income is in a bubble and a correction is imminent. 

 

However if you look at the green line it is above the blue line which indicates that property prices as a ratio of income and interest rates are still affordable and not in a bubble. 

 

However, I think house price growth will slow in 2015 against a back drop of increasing unemployment figures amongst other indicators. 

 

Ed Chan

Founder & Non Executive Chairman Chan & Naylor Accountants 

www.chan-naylor.com.au

Ed Chan

Disclaimer: This article contains general information. Before you make any financial or investment decision you should seek professional advice to take into account your individual objectives, financial situation and individual needs.

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