Despite the dramatic rise in house prices amid the pandemic, most capital cities are still considered affordable for many Australian buyers.
A new study from InvestorKit has found that house prices in six of the eight capital cities are surprisingly still seen as 'undervalued', indicating positive signs of affordability for potential buyers.
Perth the most undervalued city
Of all the capital cities, Perth home prices are the most undervalued at $ 510,000, 63% cheaper than the maximum price a local household can afford.
The large housing affordability gap, according to the study, is due to Perth's high personal income level and low median house prices – the lowest among the capital cities.
As market pressure in Perth is high, sales volumes and listings have started to stabilize, which will slow growth rates for the next year.
However, with the city still experiencing strong pressure and weak 10-year price growth of 9%, there may still be growth opportunities.
Darwin is the second most undervalued capital city, with a median price of $ 550,000 61.3% below affordability.
If interest rates were to rise, Darwin's median price would be another 42.8% cheaper.
The study noted that Darwin's high level of personal income – the highest among the capital cities – and low housing prices make it more affordable.
How InvestorKit calculated affordability
InvestorKit analyzed the eight capital markets through the viability of mortgage loans, which used the percentage difference between the current median house price and the "affordable house price" to determine if the market is undervalued. or overestimated.
The price of affordable housing is based on the average local income of a two-earner household and loan affordability of 30% of net income.
The study calculated the maximum home price of an affordable home loan repayment for an interest rate of 3.5% and a potential rate hike to 4 , 5%.
Interestingly, a recent study by the National Housing Finance and Investment Corporation (NHFIC) found that the pandemic has made conditions difficult for many potential buyers looking to enter the housing market.
However, the NHFIC study indicated that affordability remained relative and dependent on geographic locations.
The other capitals remain affordable
The median house price in Brisbane is also surprisingly undervalued despite the sharp increases over the past year.
The city's median home price of $ 603,000 is 29.6% lower than the median affordable price at an interest rate of 3.5%.
Brisbane will remain undervalued even with a 1% increase in interest rates. In this scenario, prices would be 14.8% below the median affordable price.
Adelaide is also significantly undervalued: its median price at $ 526,600 is 42.8% below the median affordable price.
The study predicts that sales market pressure in Adelaide could push the city to be one of the top performing capital markets.
Meanwhile, Hobart's lowest average personal income means that its current median price of $ 595,000 is undervalued by only 18.3%.
If interest rates rise, the median real estate price in Hobart would only be 5% below the affordability threshold.
Sydney, Melbourne's overvalued markets
According to the study, only Sydney and Melbourne are the only overvalued markets.
House prices in Sydney are the most overvalued – its median house price is now $ 1.11 million.
This makes Sydney 22.3% overvalued, which means house prices are much higher than the average household can afford.
If mortgage interest rates rise 1%, house prices in Sydney will exceed affordability by almost a third.
In Melbourne, the median house price is $ 818,000, which exceeds the affordability level of 2.8% at an interest rate of 3.5%.
If interest rates went up to 4.5%, the market would be overvalued by 13.9%, with the maximum affordable home price for an average two-earner household being $ 795,000 .
The ACT is about to be overvalued – while its current median price at $ 826,000 is still 6.6% below the affordability threshold, it could become overvalued by 5.6% if rates were to increase by 100 basis points.
–
Photo by @ michael75 on Unsplash.
