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.

According to the study, the large gap in housing affordability is due to Perth’s high level of personal income 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 next year.

However, with the city still experiencing great pressure and weak 10-year price growth of 9%, there could 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 capital cities – and low housing prices make it more affordable.

How InvestorKit calculated affordability

InvestorKit analyzed the eight capital markets through the Home Loans Service Facility, which used the percentage difference between the current median home price and “affordable home prices” to determine whether the market is under or under. overvalued.

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

The study calculated the maximum home price of an affordable mortgage 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 property price in Brisbane is also surprisingly undervalued despite the strong gains of 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 of $ 526,600 is 42.8% below the median affordable.

The study predicts that pressure from the sales market in Adelaide could push the city to be one of the best performing capital markets.

Meanwhile, Hobart’s lowest average personal income means its current median price of $ 595,000 is only undervalued by 18.3%.

If interest rates rise, the median house 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.

Home prices in Sydney are the most overvalued – its 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 interest rates rise 1%, Sydney house prices will exceed affordability by almost a third.

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

If interest rates rose to 4.5%, the market would be overvalued by 13.9%, with the maximum affordable home price for the average two-earner household being $ 795,000.

ACT is on the verge of being overvalued – while its current median price of $ 826,000 is still 6.6% below the affordability threshold, it could become 5.6% overvalued if rates were to rise of 100 basis points.

Photo by @ michael75 on Unsplash.