Despite the dramatic rise in house prices during the pandemic, most capital cities are still considered affordable for many Australian home buyers.

A new study from InvestorKit found that home prices in six out of eight capitals are surprisingly still considered “undervalued,” indicating positive signs of affordability for potential buyers.

Perth the most underrated city

Of all capital cities, house prices in Perth are the most undervalued at $510,000, 63% cheaper than the maximum price a local household can afford.

According to the study, the large gap in housing affordability is due to Perth’s high personal income levels and low median home price — the lowest among capital cities.

While market pressures are high in Perth, sales volumes and quotes are starting to stabilize, which will slow growth rates for the next year.

However, with the city still under high pressure and a low 10-year price growth of 9%, growth may still be possible.

Darwin is the second most undervalued capital city, with a median price of $550,000 which is 61.3% below its affordability level.

If interest rates were to rise, Darwin’s median price would still be 42.8% cheaper.

The study noted that Darwin’s high personal income level – the highest among capital cities – and low house prices make it more affordable.

How InvestorKit calculated affordability

InvestorKit analyzed the eight capital markets by usability of home loans, using the percentage difference between the current median home price and the “affordable home price” to determine whether the market is undervalued or overvalued.

The affordable housing price is based on the average local income of a two-income household and an affordability of 30% of the net income.

The study calculated the maximum house price of an affordable home loan repayment at an interest rate of 3.5% and a possible interest rate increase to 4.5%.

Interestingly, a recent survey 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 found that affordability remained relative and dependent on geographic locations.

Other capitals remain affordable

Brisbane’s median house price is also surprisingly undervalued, despite strong gains over the past year.

The city’s median home price of $603,000 is 29.6% lower than the affordable median price with an interest rate of 3.5%.

Brisbane will remain undervalued even with a 1% rise in interest rates. In this scenario, prices would be 14.8% lower than the median affordable price.

Adelaide is also significantly undervalued – the median price of $526,600 is 42.8% lower than the median affordable price.

The study predicts that pressure on the sales market in Adelaide could force the city to become a top performer in the capital markets.

Meanwhile, the lowest median personal income in Hobart means that the current median price of $595,000 is only 18.3% undervalued.

If interest rates rise, Hobart’s average home price would be just 5% below the affordability threshold.

Sydney, Melbourne’s Overvalued Markets

According to the study, only Sydney and Melbourne are the only overvalued markets.

Sydney home prices are the most overvalued – the median home price is now $1.11 million.

This makes Sydney 22.3% overvalued, meaning house prices are much higher than the average household can afford.

If mortgage rates rise by 1%, house prices in Sydney will exceed the affordable level by nearly a third.

In Melbourne, the median home price is $818,000, which exceeds the affordability level by 2.8% at an interest rate of 3.5%.

Should interest rates rise 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 nearly overvalued — while the current median price of $826,000 is still 6.6% below the affordability threshold, it could be overvalued by 5.6% if interest rates rose by 100 basis points.

Photo by @michael75 on Unsplash.