How much Australian property is overvalued by now

Houses are overvalued by 38 per cent across Australia’s capital cities, new analysis reveals, suggesting prices could have further to fall in the market downturn .

The data, from AMP chief economist Shane Oliver, indicates median house prices in every capital city are overvalued by at least a quarter, when compared to average rents – adjusted for inflation – over the past 40 years.

Sydney houses are overvalued by 41 per cent and Melbourne 24 per cent. But Brisbane – where house values increased by 10.3 per cent in just the year to the end of August, according to Cotality – is the most overvalued capital, at 61 per cent. Perth houses are 28 per cent overvalued.

Oliver has been calculating the metric as a way to analyse the market since 1983, and said the index is similar to the price-to-earnings (P/E) ratio used to value companies on the stock market.

“It’s not a perfect comparison … it’s not saying [prices are] about to fall 38 per cent,” Oliver said.

“But what it is telling us is that property is still very overvalued in Australia compared to where it would normally sit in terms of price-to-rent ratios,” he said, indicating some cities are more vulnerable than others in the current downturn.

AMP forecasts house prices will fall by about 10 per cent from their peak, but Oliver notes that others have predicted deeper declines, which has added “a fear element” for owners. ANZ forecasts a 14.5 per cent peak-to-trough fall for Sydney and a 12.8 per cent fall for Melbourne.

Oliver was wary about using the measure as an indication that the property market was set for a steep decline, noting there have been many times in the past two decades – particularly during the global financial crisis and early COVID lockdowns – when local and international media have used similar analyses to predict an imminent property market bust.

Angie Zigomanis, Quantify Strategic Insights’ head of data and insights, said while the initial COVID shock six years ago led to fears of property price falls, instead, a wave of interstate migration had pushed Brisbane house prices higher.

“You’ve had a post-COVID jobs boom and shift, and a lot of migration up there,” he said, noting that those moving to Brisbane, working remotely or in satellite offices, likely brought higher incomes with them, which was having an inflationary effect on property prices.

He argued there was a ceiling to this growth that the smaller capitals would have to hit soon, given the rate at which house prices were outpacing wage growth – even if supply remained tight.

“Melbourne and Sydney hit that ceiling earlier,” he said.