Australian house price down 2.1% over past year but still 36% overvalued

Australian house prices are slightly less overvalued than they were four months ago but are still 36% above their fair value, according to The Economist magazine.

In the magazine’s August 2012 update of 21 residential-property markets around the world, the Australian housing market ranked 13^th, with prices down 2.1% year-on-year.

In its previous update, The Economist reported Australian house prices as 38% overvalued.

The Economist defines “fair value” as “the long-run average ratio of house prices to disposable income and to rents”.

Australia is one of 12 housing markets where prices are falling, says The Economist, which says Austrlia is the best-performing market, with a 11% year-on-year gain.

However, the Australian market is not nearly as overvalued as Hong Kong (64% above fair value), Singapore (58%) or Canada (54%).

Over the past five years, Australian house prices are up just under 10% – modest in comparison to house price gains in Hong Kong (up 64%) and Austria (23%) and below comparable markets like Canada (18%).

The latest update shows Ireland to be the worst-performing housing market of the 21, with prices down 14.4% over the past year and nearly 50% over the last five years.

Spanish house prices decline 8.3% over the past year to July and are down 22.4% over the last five years.

The Economist says that following years of “dizzying ascents, a big dose of gravity has hit residential-property markets around the world”.

It says that many housing markets are returning “fair value” with eight countries now around or below this mark.

“But reaching this mark does not mean prices will stop falling. After dropping by a third from their 2006 peak, prices in America now stand at 19% below fair value,” says The Economist.

“The bottom of the market is close, however.”

It says that other markets like Ireland are “still in free fall”.

“Property prices in Ireland, at the foot of our table since April 2010, continue to plummet. They have now halved in value, after a fivefold rise between 1995 and their 2007 peak.

It warns that the pace of house price decline in Spain quickened in the second quarter of the year with the dire state of the Spanish economy suggesting that “prices will keep diving”.

Prices in Britain fell by 0.7% in July to be down 10.2% over the past five years.

Click here a full breakdown of how the 21 housing markets tracked by The Economist have performed.

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