WA houses are not over-valued, an independent report has found, but prices are almost 10 per cent higher because of negative gearing.
Compiled by Moody's Analytics, the report estimates that prices in WA are about 5 per cent short of being considered "fair value".
By Moody's reckoning, WA is now the second most under-valued property market in the country after South Australia. It is a long way from the peak of the pre-global financial crisis property boom when Moody's estimated prices in WA were 24 per cent overvalued.
There has been a long- running debate whether property prices across Australia are overvalued, driven in part by the country's low interest rates and relatively strong income growth.
Moody's analysts Glenn Levine and Fred Gibson said price rises in WA in recent months had been "relatively modest".
"Incomes are falling as the mining boom tapers, and WA is one of the only States were rents are declining," they said.
"The market looks soft but stable."
The biggest risk to the property market remains the State's heavy dependence on iron ore.
A 40 per cent fall in overall commodity prices would translate into a 30 per cent collapse in WA house prices.
Iron ore prices are down about 16 per cent this year but remain about $US95 a tonne.
Propping up house prices by about $44,000 each, according to the authors, is negative gearing, when owners of rental properties can claim interest payments against taxable income.
Economists have criticised the practice for many years but it is heavily defended by the property sector, which believes it is important in bringing rental properties to the market.
According to Mr Levine and Mr Gibson, WA is the most adversely affected by negative gearing, with prices almost 10 per cent higher than they would be without the system in place.
This is because of the high wages in WA and the big proportion of top marginal tax earners in the State.
The effect of negative gearing on prices has fallen in recent years because of the sharp fall in interest rates.
"At its 2008 peak, negative gearing added 15 per cent to valuations, yet even today's 9 per cent support is a substantial subsidy to the nation's homeowners," the analysts said.
The least effect of negative gearing is in Tasmania.