If you instead adopt one of several sensible alternative assumptions proposed in Dr Tulip's paper, you get wildly different results. Specifically, if future capital gains track historical household income growth; house price appreciation over the past decade; surveyed expectations for property price rises; or historical rental inflation, the model finds residential real estate was 20 per cent to 30 per cent overvalued in April last year (see graphic).

So how could it now be telling us homes are suddenly "30 per cent undervalued"? Since Dr Tulip's original paper was released, home values have jumped 11 per cent (a pace they've maintained in the past quarter). Over the same period, wages grew by just 2.3 per cent. Australia's house price-to-income ratio is now at a record high, as is the household debt-to-income ratio. And both continue to climb every day.

Record-low cost of borrowing

Toxically, this coincides with a unique juncture in which the cost of borrowing is at the "lowest levels in human history", according to RBA governor Glenn Stevens. This has led to unprecedented speculative investment and interest-only lending, which are breaching records set during the 2002 and 2003 boom the RBA described as a bubble.

Dr Tulip says: "What has changed since [April last year] is that real long-term interest rates have fallen substantially. That fall made housing more attractive relative to renting, despite the increase in prices." Specifically, the 10-year Australian government bond yield declined from 3.95 per cent to 2.65 per cent between April last year and April this year. That's equivalent to more than five standard RBA rate cuts. The reason this is so important is that the 10-year yield is the risk-free proxy for long-term interest rates and the benchmark used to price the 10-year fixed-rate mortgage Dr Tulip uses to represent borrowing costs in his paper.

So the 33 per cent decline in 10-year interest rates has forced his model to move from suggesting housing is "fairly valued" (using the post-1955 capital growth rate) to today being "30 per cent undervalued". More correctly, one could say the model has shifted from indicating housing was 20 to 30 per cent overvalued in April last year to being fairly valued today.

Expected house price gains and overvaluation. RBA

There is a huge problem, however, using current 10-year interest rates as a guide to the future price of money. First, the Aussie 10-year government bond yield is mainly determined by, and more than 90 per cent correlated with, the US 10-year yield. More significantly, Aussie and US 10-year yields have been radically reduced to their lowest levels ever by central banks, not free markets, directly intervening in asset pricing. Governments around the world have spent more than US$10 trillion ($13.41 trillion) buying bonds to artificially crush yields and hence the long-term cost of money. It's exactly the same as the Chinese state buying billions of dollars of listed equities to prevent prices falling. Western governments have been intervening even more heavily (that is, trillions not billions) by buying bonds to stop yields rising.

Former Harvard professor and US presidential adviser Lawrence Lindsey told Bloomberg recently that if he had advised his students that the US jobless rate would be 5.3 per cent while short-term interest rates were zero, he would have been kicked out of university. Arguing the Federal Reserve had (again) kept rates too low for too long, Lindsey maintained the US 10-year yield, which is now 2.2 per cent, could easily climb to 8 per cent, which – while in line with historic averages – is more than double consensus estimates of the "new normal".

Aussie housing may be fairly valued if mortgage rates stay at century lows. But if they rise back to near average levels over the next three to five years, our homes are hugely overvalued.