Australia’s housing market is one of the most overvalued in the world, but necessary prices corrections could weaken households’ financial health, new research shows.
The report, published this month by Deutsche Bank Global Markets Research and the Organisation of Economic Co-operation and Development (OECD), puts Australian houses as being overvalued by 44%.
Australia’s annual rise in real terms over last year is at 6.6%, the second most overpriced OECD country after New Zealand at 8.2%. OECD said NZ house prices are 70% too high.
The United States was equal to Australia, followed by Canada with 5.2% and Germany with 5.1%.
The OECD categorizes countries into five categories depending on whether housing is overvalued, appropriately valued, or undervalued and if home prices are rising or falling.
It put Australia in the fifth group, where houses appear overvalued but prices are falling. 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. Australia is the one non-European country in this group.
“While price corrections in these countries are necessary, they are also concerning as they weaken households’ financial health and potentially fragilize banking sectors,” OECD warned.
Commonwealth countries were found to have the most overvalued property markets among the OECD countries.
Japan, where prices have been in an on-off 25-year decline, remains the cheapest market within the OECD – prices fell in real terms by nearly 2% in 2013.