The International Monetary Fund has warned that Australian house prices might be overvalued by as much as 10 per cent.
According to the IMF's latest research, What Drives House Prices in Australia? A Cross-Country Approach, cyclical factors such as low interest rates, the commodities boom and disposable income levels have all contributed to inflated house prices, but their over-valuation appeared milder than in the past.
Price-to-income ratios - the proportion of income spent on housing costs - was high, above 10-year averages by about 20 per cent at the end of June, the fund's working paper said.
However, this over-valuation was similar to ratios appearing in New Zealand and Canada.
But while overvalued prices suggests some adjustment might be required, the IMF said high house values could be balanced by incomes and rents growing faster than house prices, migration and changes in terms of trade.
''Thus, a decline in house prices is only one way for the adjustment to occur, and the correction required in prices can occur gradually,'' it said.
That said, the IMF still warned authorities to "remain vigilant" to emerging risks given that household debt is relatively high at over 150 per cent of household disposable income.