Business Spectator’s Callam Pickering has produced an interesting assessment of the RBA’s new research paper, which attempts to determine whether Australian homes are overvalued versus renting.
Like my analysis posted earlier, Pickering also concludes that Australian housing is significantly overvalued given the likely prospects for incomes and capital growth; although how he arrives at his conclusion is a little different:
My general view is that Australians are frequently ripped off when purchasing a home. A combination of poor housing policy… combined with housing supply restrictions… have resulted in arguably the most expensive housing stock in the world…
[The RBA] find that the decision to buy or rent is highly sensitive to one’s expectations regarding capital appreciation. Their base scenario assumes that house prices will continue to grow at their post-1955 average, during which time real house prices rose by 2.4 per cent annually. Under this scenario, housing is perfectly priced compared with rents.
But as I’ve argued frequently it is unreasonable to assume that future house price growth will match past gains…
The sensitivity of their analysis to various price growth assumptions is contained in the graph below.
Structural shifts in the Australian economy resulting from an ageing population and a declining terms of trade, combined with the Chinese economy slowing, will weigh on income and price growth, while high levels of indebtedness should place a speed limit on potential growth.
The most interesting scenario considered by Fox and Tulip is the scenario where real house prices grow at the rate of household income growth (denoted in the graph by “HHDY”). This scenario is perhaps a little optimistic (the risks to income growth are on the downside) but it approximates our current reality… Under this scenario, housing is overvalued by around 20 per cent…
[The RBA research] using plausible assumptions for price growth, suggests that housing is severely overvalued in Australia and many Australians are getting ripped off.
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness.
Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.
