Investors should expect house prices to fall between 5 and 10 per cent when the RBA begins tightening interest rates in 2018-19, but a 20 per cent 'crash' is unlikely, says AMP Capital.
In a note on Australian residential property, AMP Capital chief economist Shane Oliver said house prices are overvalued on most measures – but a disorderly crash is unlikely to eventuate.
The median multiple of house prices to household incomes in Australia is 6.6 times, Mr Oliver said.
By comparison, the same multiple 3.9 in the US and 4.5 in the UK. The Sydney multiple of price to income is 12.2 times, and in Melbourne it is 9.5 times, he said.
Looking at the ratio of house prices to rents adjusted for inflation, Australian houses are 39 per cent overvalued and units are 13 per cent overvalued, Mr Oliver said.
The rise in house prices has been accompanied by a surge in household debt prompted by low interest rates, he said.
But a general property crash in the vicinity of a 20 per cent fall would require one or more of three events to occur, Mr Oliver said: a recession, a sharp increase in interest rates and an oversupply of property.
Assessing each of the three criteria, Mr Oliver said a recession appears "unlikely"; interest rate hikes are not likely until 2018 and the RBA will take account of households' greater sensitivity to higher rates; and a property oversupply would require the current construction boom to continue for "several years" (although he acknowledged the looming oversupply in some apartment markets).
As far as investors are concerned, residential property is "expensive on all metrics" and offers a very low net rental yield of 2 per cent or less, leaving investors "highly dependent on capital growth", Mr Oliver said.
"But it is dangerous to generalise. Apartments in parts of Sydney and Melbourne are probably least attractive. [It is] best to focus on areas that have lagged behind."
"Finally, investors need to allow for the fact that they likely already have a high exposure to Australian housing. As a share of household wealth it’s nearly 60 per cent," Mr Oliver said.