The strength of the property market will start to diminish in 2016 with one major bank forecasting a prolonged period of subdued capital growth.
On Friday, NAB Group Economics reduced its forecast for detached house price growth in 2016 and highlighted growing risks in the apartments market due to a sharp increase in construction activity.
On a national level, NAB expects house prices to increase just two per cent in 2016, largely reflecting a slower pace of growth in Sydney and Melbourne.
“In an environment where income growth continues to be modest, alongside lower population growth, the rates of house price growth seen in Sydney and Melbourne are unlikely to continue, suggesting more modest price gains in 2016,” the group said.
“Regulatory changes to address risks in housing credit (particularly investor credit) have tightened conditions in the mortgage market, which is likely to have at least some impact on housing demand (even if only at the margin).
“However, the response from some corners claiming that these factors point to a sharp correction in house prices in the medium term, are extreme in our view.”
In light of pent up demand and an environment of low interest rates , NAB Group Economics believes it would most likely require a substantial shock to the labour market and/or for interest rates to increase sharply to trigger significant declines in house prices. The group said that while there are risks, neither of these are anticipated in its forecasts.
“Rather, the most likely outcome would be a prolonged period of very subdued capital growth. A period of subdued capital growth would also be consistent with our expectation of a period of subdued rental growth.”