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Recent reports that Australian property is overpriced and heading for a correction have been criticised by a leading real estate commentator, who said it is just Sydney-based property which is at risk of becoming overvalued.
Louis Christopher, managing director of SQM Research, recently responded to comments by Christopher Joye – a columnist for the Australian Financial Review – that there was a heightened risk of Australian property prices declining by up to 20 per cent.
Mr Christopher said an effective measure for valuation is house prices to nominal GDP because “one can’t have a situation where house prices indefinitely rise faster than income growth”.
Mr Christopher said based on this measurement, it is just Sydney that is “going into overvalued territory”. He said if Sydney was removed from the equation “the market would now be trading at a discount to nominal GDP”.
“The reason the market is not as massively overvalued as Chris Joye would have you believe becomes all too apparent [when using this measurement],” Mr Christopher said. “For an extended period in the last four years, the market underperformed compared to nominal GDP. Indeed it went through a correction between 2010 and 2012 … That allowed income levels to catch up and reduce the premium in the market.
“So no, the market is not massively overvalued. Eventually, when we get to the market peak we might be well into overvalued territory. Presuming that rates do rise early next year, as the money markets are forecasting, then I suspect this would slow the market down during 2015, thereby creating a soft landing for the housing market.
“One thing in all this is we do know the market is sensitive to interest rates, so SQM Research does expect a reaction when rates go up again. But it is very unlikely in our opinion, that one would get an across the board, large scale, 20 per cent fall in the market.
“For that to happen, we think the RBA would have to lift rates aggressively going into 2015 by at least 200 basis points in a very short space of time, and/or for unemployment to dramatically rise above 7.5 per cent. And at this time those scenarios seem very unlikely.”
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