Fears that Australian house prices are in bubble territory have receded as price rises have moderated since the global financial crisis. But The Economist magazine says Australian property is still among the most expensive in the world.
The Economist uses two ways for working out whether a property is overvalued or not. One is the ratio of disposable income per person to prices, a measure of affordability.
On this measure, Australian house prices are 24 per cent overvalued, the fourth-most overvalued of the 18 countries in the survey after France, the Netherlands and Canada.
The other measure is the prices-to-rents. On this measure, Australia is also the fourth-most overvalued in the world, after Hong Kong, Canada and Singapore. However, as property prices in the most developed countries around the world have been falling since the GFC, the overall risk of a property price bubble has decreased.
Louis Christopher, the managing director of specialist property researcher SQM Research, says comparative studies need to fully account for the differences in tax treatment of property in each country. "Negative gearing" helps to drive investor demand for property and prices higher, he says. This is where if the costs of investing are more than income from the investment, the shortfall reduces the investor's income on which income tax is paid.
Christopher says Australian property prices are expensive by world standards. "But I cannot see any of the triggers that would cause a sharp downturn in prices at this point in time," he says. Except in parts of Melbourne and in some coastal holiday locations, there is no oversupply of residential real estate. Unemployment is low and interest rates are not likely to rise sharply, he says.
Auction clearance rates in Sydney and Melbourne are rising and record low interest rates will encourage more first home buyers into the market as the year progresses, Christopher says. An increase in first home buyers creates upward pressure on prices in the lower and middle parts of the market, he says.
Property researcher, RP Data, says Sydney property prices are up 3.7 per cent over the past year and Melbourne prices are 1.6 per cent higher. Property values across the capital cities contracted 0.5 per cent over the month of April, but RP Data says that is more due to seasonal factors, with the first three months of the year typically the strongest for price growth.
Tim Lawless, RP Data's director of research, said earlier this month the April results represent more of a stumble along the path to recovery than a sign of a renewed trend in price falls. ''When viewed in line with other metrics, such as auction clearance rates, private treaty indicators and some improvement in housing finance demand, it is likely that the negative April result will be a blip along the path to recovery,'' he says.
Christopher says there is some oversupply still in Melbourne among apartments in Southbank and Docklands, and still a lot of house and land packages to be completed in some ''outer-ring'' suburbs.
''But building approvals in Melbourne have tapered off a bit and we are finally coming to the end of the peak of the construction cycle in Melbourne,'' he says.
Prices are rising in Carlton, Richmond and Albert Park, Christopher says. Prices are also rising in many inner-east locations of Sydney, including Paddington and Surry Hills. They are also growing in Sydney's inner-east suburb of Elizabeth Bay after a substantial downturn in prices there, he says.
Melbourne prices are 16 per cent higher.