A new report shows current Australian home prices are effectively a gamble on interest rates staying near record lows.

The report from Moody's Analytics finds that Australian home prices are generally around their 'fair value' at current interest rates, and under existing government housing subsidies.

However, the report warns that all of Australia's housing markets, except South Australia, would be overvalued if interest rates rose back to normal levels and pushed up mortgage repayments.

Moody's estimates the normal cash rate at 4.5 per cent, 2 percentage points higher than current levels.

Victoria is estimated as the most overvalued property market - prices are already 12 per cent higher than Moody's considers fair value, and would be 21 per cent too high if interest rates were at typical levels.

The report says a combination of stagnant incomes and an increasing over-supply of housing, particularly in certain areas, is likely to push the state further into overvaluation.

Moody's says the Northern Territory and New South Wales would also have double-digit overvaluations under normal interest rates, and are modestly overvalued currently.

However, South Australia is the only region to be considered fairly valued if interest rates rise, and is 7 per cent undervalued with current low rates.

The Moody's model of housing values backs up a recent Reserve Bank study that found Australian housing to be somewhere between fair value and slightly overpriced.

Negative gearing adds 9pc to home prices

As the Moody's study takes into account the cost of borrowing money to buy housing in its valuation, it has also examined the effect of negative gearing on home prices.

Nationally, the report estimates that negative gearing adds 9 per cent, or around $44,000 on average, to current home prices.

However, the effect rises when interest rates are higher - the study found that allowing interest write-offs against all personal income added 15 per cent to national prices when interest rates hit their 2008 peak.

The effect on prices also depends which area you live in - areas with higher incomes receive a bigger subsidy from the policy, therefore creating a slightly bigger upward push for home prices.

This effect is particularly apparent in Western Australia and New South Wales.

Moody's analysts Glenn Levine and Fred Gibson say economists have criticised negative gearing as an unfair and unproductive distortion that costs the Federal Government around $4 billion a year.

"There is growing recognition that eventually the scheme will be overhauled," they noted in the report.

Rates unlikely to rise far: Credit Suisse

However, a separate report offers some solace to home owners with mortgages who might be worried about their property values sliding as interest rates rise.

Analysts from investment bank Credit Suisse have found households are already paying 21 per cent of their disposable income on servicing their debts, even at a record low official cash rate of 2.5 per cent.

That is only just below the 2008 peak of 23 per cent when the official cash rate was 7.25 per cent.

A mere 1 percentage point of rate increases from the Reserve Bank would take Australians' debt repayment burden back to that level, which Credit Suisse views as "unsustainable".

However, the report concludes that it is precisely this extremely high level of household indebtedness that is likely to shield borrowers from significant rate rises.

"We believe that rates will be lower for longer, because the structural rise in household leverage caps what the RBA can do with rates," the report's authors Damien Boey and Hasan Tevfik conclude.

"We do not believe that the RBA will raise rates any time soon. But if the bank were to tighten, we estimate that the peak in rates would probably occur below 3.5 per cent, before households start to experience GFC-like stress levels in terms of meeting principal and interest payments."