Thursday, March 10, 2011

Australia house prices March 2011

In theory, the price of a home should reflect the value of the services it provides. People who choose to rent their homes buy those services on a monthly basis.
Home prices should therefore reflect the rents that tenants pay. The Economist's index calculates the ratio of prices to rents in 20 economies. index

In Australia, that ratio is 56% above the long-run average.
House prices fell from March 2008 to March 2009 (as measured by the weighted average of the eight state capitals), then resumed their rise. In the year to the first quarter of 2010, they jumped by 18.8%!
Maybe something has changed in Australia that now warrants a higher ratio. The Economist's chart suggests some kind of structural break after 2000.

If you compare today's price-to-rent ratio with its average over the past ten years, it is overvalued by 12%, not 56%.

Compared with its five-year average, it is overvalued by just 3%.