Australia’s housing market sixth most overvalued but prices falling: OECD

Australia has ranked as the sixth most overvalued OECD housing market behind Belgium, Norway, Canada, New Zealand and France, but with prices falling.

It is the only non-European country included in a category “where houses appear overvalued but prices are falling” released as part of the OECD's latest global economic update.

“This category is the largest as it includes many European countries where the post-crisis housing market correction is still ongoing, most notably Spain, but also the United Kingdom, Belgium, Denmark, Finland, the Netherlands and one non-European country, Australia,” says the OECD.

“While price corrections in these countries are necessary, they are also concerning as they weaken households’ financial health and potentially fragilize banking sectors.”

It follows The Economist magazine ranking Australia the fourth most overvalued housing market behind France, the Netherlands and Canada earlier this month.

The OECD determines the fair value of a housing market based on two measures: the price-to-rent ratio (a measure of the profitability of owning a house) and the price-to-income ratio (a measure of affordability).

If the two measures are above their long-term averages, house prices are said to be overvalued, and vice-versa.

On a price-to-rent ratio Australian house prices are about 35% overvalued while on a price-to-income ratio they are about 20% overvalued.

The figures were released as part of the OECD’s latest global economic update, where it said the global economy was moving forward but with divergence between countries and regions reflecting “the uneven progress made toward recovery from the economic crisis”.

It projects Australian GDP growth of 2.6% in 2013 rising to 3.2% in 2014 outperforming other OECD countries with GDP projected to rise by 1.2% this year and by 2.3% in 2014.

“The expected weakening of the boom in mining investment will be only gradually offset by the sector’s increasing export capacity and the strengthening of the non-mining sector,” notes the OECD in its May economic forecast summary.

“The persisting high exchange rate and still fragile confidence are inhibiting the emergence of new drivers of growth.

“In the absence of inflationary pressures, monetary policy should remain accommodative in order to underpin activity.

“The authorities need to gradually balance the public budget so as to restore fiscal leeway. Should activity worsen significantly, however, there is scope for fiscal policy to be relaxed to support demand. A tax reform to improve the effectiveness of housing taxation and lower corporation tax by means of an increase in VAT would enhance efficiency.”

The OECD anticipates the world real gross domestic product (GDP) is projected to increase by 3.1% this year and by 4% in 2014.

Across OECD countries, GDP is projected to rise by 1.2% this year and by 2.3% in 2014, while growth in non-OECD countries will rise by 5.5% this year and 6.2% in 2014.

In the US, activity is projected to rise by 1.9% this year and by a further 2.8% in 2014.

GDP in the euro area is expected to decline by 0.6% this year and then rebound by 1.1% in 2014, while in Japan GDP is expected to grow by 1.6% in 2013 and 1.4% in 2014.

“The global economy is strengthening gradually, but the upturn remains weak and uneven,” said OECD secretary-general Angel Gurría.

“Supportive monetary policies, improving financial market conditions and a gradual restoration of confidence are at the root of the recovery. Also, the fiscal adjustment of the last few years is beginning to pay off. Several countries are close to stabilising their government debt-to-GDP ratios and ensuring a gradual decline in indebtedness over the longer term,” he said.