House prices 'overvalued by 20pc'
After a big jump in interest rates, house prices for investors are overvalued by about 20 per cent, Westpac says.

The bank expects the housing market to cool down "on all fronts".

Westpac economist Dominick Stephens said that if fixed-term mortgage rates remained high for a long time they would have a "big impact" on the housing market late this year and next year.

The "investor value" of an average home is about $65,000 less than present market prices, after an extremely sharp jump in fixed mortgage rates this year from 7.9 per cent in February to 8.6 per cent for five year terms, Westpac says.

The average median selling price is $343,500, but the Westpac report suggests the current value for an investor is only $278,000 - and that is based on conservative assumptions on interest rates and a rise in rents.

The investor value of $278,000 on average is calculated using a five-year fixed mortgage rate of 8.5 per cent, though advertised fixed mortgage rates for two years are about 9 per cent. A higher interest rate would imply a lower investor value.

The calculation also assumed a 2 per cent increase in rents in the six months to June and a long-run average capital gain of 6 per cent a year, though Westpac expected house prices to stagnate next year.

"Houses are now selling for much more than they are worth to property investors," Mr Stephens said. The numbers "don't appear to stack up for investors", though the figures did not mean investors would immediately start selling for as little as $278,000 for an average house.

The lack of return for investors would remove one element of demand, especially at the lower end for investment property and first homes.

It is unclear how big a part of the market investors make up, but they could borrow up to a third of all home loans. There would be a notable absence of new investors from the market and house sales volumes would slow down, Westpac said. High prices and high mortgage interest rates were also tilting people toward renting instead of buying.

"On all fronts the housing market looks set to cool," Westpac said.

Rents are expected to rise, but renting remained a cheaper option than trying to pay off a mortgage.

Westpac argues that the recent boom in house prices is not a bubble. Rather, property was seriously undervalued in 2001 to 2004 by about as much as prices are overvalued now. Prices caught up with the "true value" only in the last couple of years.

The investor value of a home of $327,000 at the end of last year compared with a selling price of $328,000, indicating prices were fair value.

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