But it is a verdict that comes with a sting in the tail: our homes are nonetheless overvalued by up to 35 per cent and we may have only three years to fix the problem or face some devaluation pain.

It has been several months since The Economist magazine published a report on Australian house prices that stated they were the most overvalued in the world, a conclusion that caused international investors to take short positions against local banks on the assumption the ”bubble” would soon burst.

Those investor jitters, in turn, prompted a comprehensive 70-page analysis of Australia’s housing market by Goldman’s chief economist Tim Toohey who sketches some interesting scenarios around what could cause Australian property prices to deflate to more realistic levels, drawing some equally interesting conclusions about when that might happen.

”We think that the behaviour of house prices over the past year, and indeed the past decade, does not resemble a speculative bubble,” Mr Toohey said.

That’s because of a number of factors, including the refinancing of established homes being at a nine-year low, loan-to-value ratios on existing homes being well below 2000 levels and the loan-to-value ratio of new dwellings remaining broadly unchanged over the past decade.

Mr Toohey goes on to argue that there is a big difference between a speculative bubble and a period of overvaluation, which can extend for a long time if supported by fundamentals such as relatively low interest rates, population growth, undersupply and strong demand.

But just because there isn’t a speculative housing bubble, it doesn’t mean that we can avoid future financial pain in the form of fluctuating property prices.

Mr Toohey argues Australian house prices are overvalued by between 24 and 35 per cent. They have risen, Bureau of Statistics data shows, a whopping 18.4 per cent over the past year, 50 per cent over the past 5 years, 165 per cent over the past 10 years, 246 per cent over the past 15 years and 289 per cent over the past 20 years.

But the ABS statistics might be inflated as they do not take into account the cost of units or property prices in regional Australia.

As a result, nationwide dwelling prices appear ”far more restrained in 2010 and are currently demonstrating signs of moderation”. That’s a fortunate outcome.

Australians are now so geared with debt that it is not possible to inflate our way out of the situation with higher house prices. Our household debt is high relative to our own history and compared with other countries. Only the Netherlands and Scandinavian countries have higher debt-to-household-income ratios, Mr Toohey said.

To lower our gearing ratios to more healthy levels would mean reducing overall household debt by 8 per cent or, alternatively, raising house prices by 9 per cent.

Australia is also suffering from a chronic housing shortage that is set to worsen over the next two years as demographic demand outstrips supply.

”By the end of 2012 we estimate the national housing shortage will be 250,000 – nine times the size of the next largest shortage in our database back to the mid-1970s.”

This, and a resurgence in first home buyer demand, is likely to keep upwards pressure on prices.

And that’s where the pain comes in.

Mr Toohey harks back more than a century to the period between 1880 and 1900 for an interesting parallel.

Back then, house prices to income per head of population were the same as they are now, primary commodities were again the dominant export (to England instead of China) and residential investment as a share of gross domestic product was similar.

The withdrawal of foreign capital was the primary trigger for a recession in the 1890s. Now, our main risk is reliance on foreigners to fund Australia’s investment savings gap, which requires ongoing foreign appetite for Australian bank bonds, Mr Toohey said.

The prospect of an abrupt and sustained decline in trade with China or an oversupply of resource commodities in world markets may be the catalyst for a downward shift in house prices.

”Our best guess is that iron ore and coal markets could well face this prospect in 2013-14.”

Tighter fiscal policy and ”jawboning” property owners with higher interest rates may prevent households from becoming even more exposed in the face of a downturn, Mr Toohey said. Government policy should aim to bring forward budget surpluses and bank them in a sovereign wealth fund to smooth the rough economic ride ahead.

The Reserve Bank has spent much of the past two years explaining why our house prices and debt levels are less of a concern than those of other countries.

”The nation may be better served by it highlighting the risks to Australian households of excessive leverage should house prices fall in concert with a terms of trade adjustment,” the Goldman Sachs report said.

If Mr Toohey is right, that gives you and me and the government three years to batten down the hatches and reduce our exposure. Not much time really.