Growth in house prices across the capitals is forecasted to continue over the next two years, but rapid construction and expected rate hikes may lead to price declines in most cities in 2016/2017, a new report has predicted.
The analysis by BIS Shrapnel identifies low interest rates and tight market conditions as catalysts for price increases over the short term.
“The current standard variable rate of 5.95 per cent is - outside of the GFC emergency low interest rates in 2009 - the lowest level in over 40 years,” said BIS Shrapnel senior manager Angie Zigomanis.
“As a result, affordability in most capital cities remains at early-2000s levels, which should be supportive of price growth.”
Moreover, population growth has experienced a surge while supply pressures remain high after an extended building slump.
The strongest markets are predicted to be New South Wales and Queensland, due to tight supply in both the sales and rental market.
Melbourne is likely to weaken due to high construction activity, while Perth and Darwin may suffer from soft state economies.
However, as interest rates rise, prices may begin to drop across the country.
“The Reserve Bank is expected to enter a tightening phase towards the end of 2015,” Mr Zigomanis said.
“Initial rises are likely to have a limited effect with the economy strengthening, although further rises will more significantly impact on affordability and prices through calendar 2016, while also eventually having the desired effect of slowing economic growth and inflationary pressures.”
In addition, BIS Shrapnel anticipates current construction levels will cause stock deficiencies to fall in all states.
“As a result, BIS Shrapnel expects all markets to weaken by 2016/2017 with the level of weakness depending on any dwelling deficiency still remaining and how far affordability is strained as interest rates peak,” Mr Zigomanis said.
The report found that, by 2017, only Sydney and Brisbane would have experienced any growth in house prices in real terms over the previous three years, with all remaining capitals expected to record price declines.