Australian house prices aren't overvalued yet, but negative gearing tax breaks have added almost 9 per cent, or $44,000, to current average house prices, financial group Moody's Analytics has reported.
Subscribe now for unlimited access.
$0/
(min cost $0)
or signup to continue reading
While properties aren't currently overvalued, there are "worrying trends” that could come back to bite homebuyers when interest rates rise as rents and incomes have failed to keep pace with surging property prices, the report cautions.
Moody’s compared house prices with long term valuations – taking into account rents, income and the costs associated with borrowing, including interest rates and other charges - to asses whether the 10 per cent year on year rise in house prices in Australia's eight largest cities means property prices were overvalued.
Its analysis showed that 18 months ago house prices in all states were undervalued.
But rising house prices, which have not been accompanied by rising incomes or rents, have now pushed property values in most states to "fair value".
The report said “worrying trends” are emerging in New South Wales and Victoria, as current home valuations are a function of record low interest rates, which will “inevitably normalise” and increase towards a rate more in line with historical trends.
When Moody’s calculated the impact of rising interest rates, “the story begins to change, with nationwide prices trending towards overvalued under normalised interest rates” the report says.
The strong run up in NSW property prices meant valuations have moved to “slightly overvalued” in that state, it says.
Were it not for the recent surge in NSW rent costs, house prices there would have been even further overvalued.
Under "normalised" interest rates the NSW market also looks overvalued.
Within individual states there was also variation between areas, as well as between house prices and apartment prices, the report found.
Outside NSW and Victoria, the trend toward the higher prices that lead to overvaluation was less pronounced, it found.
“Higher prices might not be a problem if matched with fundamentals. Rising incomes and rents or falling interest rates can increase the equilibrium value of housing,” the report says.
The Moody's report also explored the impact of negative gearing – the tax break which allows the difference between rental income and interest payments to be written off against taxable income.
The report said that negative gearing costs the federal government around $4billion in lost revenue a year and noted economists had lablled it as "an unfair and unrpductive distortion".
The impact of tax “distortions” such as negative gearing in encouraging investment and lending in the housing market was also raised recently in the interim report by the David Murray-led Financial Systems Inquiry.
The Moody’s analysis, which incorporates the impact of negative gearing in “user cost” estimates, says it adds around 9 per cent or $44,000 to current average house prices.
With low interest rates, the impact of the tax break has fallen from a 2008 peak of 15 per cent, “yet even today’s 9 per cent support is a substantial subsidy to the nation’s homeowners” the report says.
