Melbourne property prices most at risk of correction: Moody's Analytics
The Australian housing market remains fairly valued relative to its long-run drivers of price: rents, incomes, and the user cost of capital, according to Moody's Analytics.
"There is, however, substantial divergence between the states," Glenn Levine, senior economist in the Sydney office of Moody’s Analytics said.
Levine expects an upwards push on residential prices this year following the latest rate cut.
And then another interest rate cut likely midyear would also prop up property market sentiment.
New South Wales prices are among the highest in the country and properties are marginally overvalued, as rents and incomes remain elevated, it noted.
Income growth was weak in 2014, and if this continues in 2015 while house prices continue to rise, as expected, the New South Wales market could drift further into overvalued territory, it warned.
However Levine signalled the Victoria market was still the "biggest cause for concern".
A steady flow of new supply kept rents flat in 2014, while income and employment growth stalled.
It noted although Victoria’s population is 22% smaller, dwelling approvals have consistently outpaced those in New South Wales.
"Victoria’s housing market remains at risk," the report stated.
The weak Australian Capital Territory economy, including falling income and rents, is pushing housing steadily into overvalued territory even as prices fall.
It noted NSW was more sensitive to interest rate movement.
Levine noted the latest housing upturn being largely propelled by Australia’s major urban centres, Sydney and Melbourne, while remaining relatively flat in the rest of the country.
"One point to note is that this is a trend seen globally over the past three years," he said.
"Prices in major international cities have risen much faster than in the rest of the country.
"In the U.K., house prices have surged in Lon- don, but there is little happening outside the capital.
"In the U.S., prices in New York and Chicago, for example, have surged, while outside of the major centres activity has been relatively flat.
"This is not an explanation, per se, but may offer insight as to why Sydney prices have surged.
"It could be linked to global liquidity."
