Housing “more attractive” than renting: RBA researcher says Australian house prices 30% undervalued

Thursday 09 July 2015

Article by Kirsty Timsans

Despite recent concerns of a housing bubble, a senior Reserve Bank researcher says Australian house prices are 30% undervalued- the widest gap in three decades.

Housing attractive renting RBA Australian house prices undervalued

Dr Tulip and his co-author, Ryan Fox, delivered their findings at the Australian Conference of Economists in Brisbane yesterday saying that a year ago home prices were “fairly valued,” whereas now they are about “30% undervalued,” according to smh.com.au.

Dr Tulip’s research showed today owning a house costs 30% less than renting and current prices expectations are neither “irrational” nor “unusual.”

“Under our assumptions, owning a home is now more attractive, relative to renting, than it has been at any time in the past 30 years,” he said.

The annual costs of owning a home bought in April was found to be 2.7% of its value while the annual cost of renting the same home was likely to be 3.9%. These calculations were based on the transaction cost, the expected mortgage rate and the running and depreciation costs offset by expected capital gains.

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The change in the past year has been attributed to significantly lower mortgage rates, the results of this year’s two interest rate cuts, and changes in bond prices that imply mortgage rates will remain at historic lows for the next decade.

“What has changed since then is that real long-term interest rates have fallen substantially. That fall made housing more attracting relative to renting, despite the increase in prices,” Tulip told the conference.

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