Distortion of negative gearing adds 9% to the cost of houses in Australia

Negative gearing adds $44k or 9% to the cost of houses. Negative gearing pumping house prices, but they're not overvalued yet

Moody's compared house prices with long term valuations – taking into account rents, income and the costs associated with borrowing, including interest rates and other charges – to assess whether the 10 per cent year-on-year rise in house prices in Australia's eight largest cities means property prices were overvalued.

Its analysis shows that 18 months ago house prices in all states were undervalued.

But rising house prices, which have not been accompanied by rising incomes or rents, have now pushed property values in most states to "fair value".

Taking into account the costs of borrowing. That means that if you have cash, the absolutely last thing you should do with it is jump in and compete with supercharged leveragers in the housing market. Hard-earned, long-saved cash doesn't suddenly get any more easily earned just because emergency interest rates are kept in place for years and years.

When Moody's calculated the impact of rising interest rates, ''the story begins to change, with nationwide prices trending towards overvalued under normalised interest rates'', the report says.

Short term thinking rules the financial world.

The report said negative gearing costs the federal government about $4 billion in lost revenue a year and noted economists had labelled it "an unfair and unproductive distortion".