Reserve Bank has added 1pc to house values: report

Moody’s Analytics has found that national house prices usually increase by about 0.5 per cent every time the Reserve Bank reduces the official cash rate by 0.25 per cent, as has occurred twice this year.

“Moody’s Analytics estimates that a 25-basis-point rate cut adds approximately $4,000 to valuations in New South Wales,” it said in a new national housing report.

“It is a similar story in Victoria, where median house prices rise and remain the second highest in the country, albeit the state’s stronger housing supply caps the gains.”

House prices in NSW and Western Australia usually increase by the above-average rate of 0.6 per cent when interest rates fall by 25 basis points, Moody’s Analytics said.

There is a rise of 0.5 per cent in Victoria and Tasmania, and a rise of 0.4 per cent in South Australia.

Prices increase by 0.3 per cent in Queensland and the Northern Territory, and by 0.2 per cent in the ACT.

Moody’s Analytics also found that only three of Australia’s eight housing markets are overvalued, based on rents, incomes and mortgage rates.

Victorian house prices are 8.0 per cent overvalued, while ACT is 6.2 per cent overvalued and NSW is 2.9 per cent overvalued.

The other five states are undervalued – Western Australia by 13.0 per cent, Queensland and Tasmania by 4.3 per cent, South Australia by 1.3 per cent and the Northern Territory by 0.4 per cent.

Moody’s Analytics said these valuations reflect Australia’s low interest rates – and warned that house prices in most states are likely to become overvalued when rates increase to a “normalised” setting of 4.5 per cent.

“The biggest cause for concern is house prices in Victoria, which become more overvalued if interest rates rise to normal levels, with NSW and the ACT not far behind,” it said.

“Given the mountain of household debt in Australia, which sits around 150 per cent of disposable incomes, overstretched borrowers in these markets are at the most risk if rates rise.”