Australian house prices 30 pct undervalued: RBA researcher

Australian house prices are 30 percent undervalued with current price expectations neither " unusual" nor "irrational," internal research conducted within the Reserve Bank of Australia (RBA) has found.

Stressing the results should be attributed to him and not the RBA, the RBA's senior research manager Peter Tulip said compared a year ago where prices were "fairly valued," current prices are "30 percent undervalued", delivering preliminary results of a research paper to the Australian Conference of Economists in Brisbane on Wednesday night.

Fairfax media reported the change has been brought about by lower mortgage rates and changes in bond prices that imply mortgage rates will hug their present historic lows for another decade.

Though house prices in Sydney have risen 16.2 percent, Melbourne by 10.2 percent and the Australia's national capital average up by 9.8 percent in the past year, Tulip and his co- author, Ryan Fox, argue that rising prices say nothing about whether home ownership is good value compared with renting.

The pair found the annual cost of owning a home bought in April was likely to be 2.7 percent of its value. The annual cost of renting the same home was likely to be 3.9 percent.

"So you can either pay 2.7 percent of the value of the property to buy, or you can pay 3.9 percent of the value to rent," Tulip said. "The undervaluation is 30 percent."

"But this hasn't always been the case. Just one year ago when we last published results, we found that houses were fairly valued -- that is, the cost of buying was about the same as the cost of renting.

"What has changed since then is that real long-term interest rates have fallen substantially. That fall made housing more attractive relative to renting, despite the increase in prices." Endi