Australian house prices could be 30 percent overvalued, and still going up

Despite renewed calls that Australia's houses and apartments are seriously overvalued, demand keeps driving prices higher. 

A new report says more than 11,000 apartments will be built in the heart of Sydney in the next three years.

A former head of economics at the Reserve Bank - Jeremy Lawson, now based in London - claims Australia's house prices are 20-30 percent overvalued.

RP Data's Cameron Kusher said: "In the event of a major downturn in the Australian economy who knows how far property values could fall, but our worst case scenario isn't a 30 percent fall".

But even these dire forecasts are not slowing investors' appetite for Sydney apartments.

"As long as its feasible for developers to keep paying those prices, price growth will continue to come through," BIS Shrapnel's Angie Zigomanis said.

The combination of a rising population, record low interest rates and an under-supply of property remain the driving forces behind price rises - and new building.

"In Sydney we've got population growth of 1.7 percent over the next 10-15 years, but in the inner city we're actually seeing even stronger growth," said Matt Whitby of Knight Frank.

The area set to see most of this apartment building in Sydney is in Green Square and Alexandria, smack bang between the city and the airport, where Sydney's old factories and warehouses are going to be turned into some of the best-located housing in town.

Other parts of Sydney, notably those close to railway hubs and shopping centres, are being rapidly developed, including Chatswood, Rhodes, Ryde and Parramatta.

In the past four weeks, almost 1300 apartments have been sold across Sydney for an average $555,000 - up almost 11 percent in the past year. Sydney apartments right now are selling for more than average house prices in every other Australian capital city.

"There's been such an underdevelopment of housing for a number of years," Mr Kusher said.