House prices in Australia are now 12 percent overvalued, according to the investment bank Barclays, which says higher income coupled with lower interest rates and a rapidly growing population had boosted house prices.

"As we have long remarked, house prices have appeared expensive relative to both household incomes and rents for more than a decade now," said Barclays chief economist for Australia Kieran Davies, reports The Australian Financial Review. "The problem with these simple valuation measures is that the recent experience is unprecedented and it is not clear to us when they will correct, or even if they will fully revert to their long-term averages."

Davies says property prices are above fair value when taking into account the growing gap between household income and mortgage rates, as well as Australia's ageing population and the working age of the population. Barclays says tougher macroprudential regulation could close the gap with fair value.