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Graphic proof house prices are overvalued
Bernard Hickey
4:00AM Sunday May 17, 2009
The Reserve Bank spends an awful lot of time collecting data on the economy and trying to make sense of it. Most is hardly ever seen by the public.
This data is often buried in long reports that are pored over by economists and few others.
This data is used indirectly in the decisions made by Governor Alan Bollard on the Official Cash Rate, which everyone does care about.
But the economists at the Reserve Bank did a fantastic job this week in presenting four sets of data in charts that simply destroy any notion that housing is fairly valued.
The bank pointed this out in its usual dry language in its half-yearly Financial Stability Report.
"Despite recent declines, house prices still appear to be somewhat overvalued relative to fundamentals," it said.
Lower mortgage rates would reduce interest costs, but further house prices falls were needed to cut the multiple of house prices to income to normal levels, it said.
It then published four charts with almost no further comment, apart from this: "Higher house prices and mortgage payments relative to household disposable income are generally considered to reflect over-valued property prices. Similarly, a wider negative gap between rental yields and mortgage rates may imply over-valuation."
The implications in these four sets of data are explosive. The mini-rally in activity in the housing market and the stabilisation of prices in March and April suggest property investors and first home buyers believe house prices are reasonable again. These charts say they are wrong.
The first shows house prices are still more than five times the levels of disposable income, well above the long run average from 1990 to last year of around 3.8 times.
The second shows mortgage payments to disposable income are still around 40 per cent of disposable income, well above the long run average of 30 per cent.
Another graph shows that when it comes to the difference between mortgage interest rates and the imputed yield on owner-occupied houses, owner-occupiers have effectively been losing money since 2004.
Rental property investors have effectively been losing money since 2005.
Investors only tolerated that because they expected capital gains and were using the losses to reduce their personal tax bills.
Property investors and first-home buyers should look closely at these charts before they borrow any money.
Bernard Hickey
4:00AM Sunday May 17, 2009
The Reserve Bank spends an awful lot of time collecting data on the economy and trying to make sense of it. Most is hardly ever seen by the public.
This data is often buried in long reports that are pored over by economists and few others.
This data is used indirectly in the decisions made by Governor Alan Bollard on the Official Cash Rate, which everyone does care about.
But the economists at the Reserve Bank did a fantastic job this week in presenting four sets of data in charts that simply destroy any notion that housing is fairly valued.
The bank pointed this out in its usual dry language in its half-yearly Financial Stability Report.
"Despite recent declines, house prices still appear to be somewhat overvalued relative to fundamentals," it said.
Lower mortgage rates would reduce interest costs, but further house prices falls were needed to cut the multiple of house prices to income to normal levels, it said.
It then published four charts with almost no further comment, apart from this: "Higher house prices and mortgage payments relative to household disposable income are generally considered to reflect over-valued property prices. Similarly, a wider negative gap between rental yields and mortgage rates may imply over-valuation."
The implications in these four sets of data are explosive. The mini-rally in activity in the housing market and the stabilisation of prices in March and April suggest property investors and first home buyers believe house prices are reasonable again. These charts say they are wrong.
The first shows house prices are still more than five times the levels of disposable income, well above the long run average from 1990 to last year of around 3.8 times.
The second shows mortgage payments to disposable income are still around 40 per cent of disposable income, well above the long run average of 30 per cent.
Another graph shows that when it comes to the difference between mortgage interest rates and the imputed yield on owner-occupied houses, owner-occupiers have effectively been losing money since 2004.
Rental property investors have effectively been losing money since 2005.
Investors only tolerated that because they expected capital gains and were using the losses to reduce their personal tax bills.
Property investors and first-home buyers should look closely at these charts before they borrow any money.
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