http://www.abc.net.au/news/stories/2011/03/04/3155848.htm

________Aussie houses are world's most overpriced

By Lexi Metherell and staff
Updated 21 minutes ago

The Economist says Australian housing is overpriced by 56 per cent
(ABC News: Giulio Saggin)

Australian homes remain the most overvalued in the world, giving fresh life to the debate over whether the nation's housing market is a bubble.

The economic journal of the record, The Economist, says Australian housing is overpriced by 56 per cent.

Morgan Stanley global strategist Gerard Minack has been arguing the case for some time and thinks a bubble started to inflate in the late 1990s.

„We've had 20 years where the Australian consumers have been willing to borrow more to buy an asset that they believe always goes up in value - the classic sign of an asset bubble,” he said.

„You buy it because it's going up and you don't take account of the underlying fundamentals such as the rental return or the price relative to average income.”

On the other side of the fence is Christopher Joye, property market analyst and managing director of research group Rismark International.

He says the surge in house prices since the late 1990s can be explained by soaring disposable income.

„Australian households' disposable incomes have consistently outgrown Australian house prices over the past seven to eight years,” he said.

„The housing market is not overvalued by 50 per cent; the house price-to-income ratio is in line with its average over the past decade.”

The Economist certainly thinks the Australian property market is the worst in the world, with Australia followed closely by Hong Kong and France.

But even Mr Minack says 56 per cent may be pushing it.

„Roughly I'd think home prices are 30 to 40 per cent above their value. Fifty-six [per cent] seems a little stretch, but 30 to 40 is still well above what you'd think is sustainable over the medium term,” he said.

Mr Joye questions The Economist's methodology of comparing house prices to rents.

„The Economist has been relentlessly wrong in all of its predictions over the past 10 years in relation to the Australian housing market,” he said.

The Economist says Australian house prices have risen 215 per cent since 1997, which compares to 95 per cent in the US.

Ms Minack says it would take a serious economic shock to send house prices sharply lower, in particular job losses.

„The fact we have very expensive property makes Australia very vulnerable to any sort of economic shock,” he said.

„The example I'm pointing to at the moment is what's happening in the Gold Coast in Queensland, where tourism numbers are down.

”It's not macro-economically significant for the entire country, but what we're seeing is quite acute distress in their property market, because without the constant income growth they can't sustain prices where they are.„

Mr Joye thinks disposable income will continue to outpace property prices.

”We're not projecting substantial capital growth in 2011, so we believe that over the next year to 18 months household incomes will continue to outpace house prices, thereby improving the valuation of the underlying housing market,„ he said.”