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A global investment management group has expressed growing concerns for Australia's largest housing markets.
Investment management company Vanguard has used its 2016 economic outlook for Australia to predict that house prices in Sydney and Melbourne are set to dampen over the coming years after a period of overheating.
In the outlook, Vanguard noted that current conditions in the housing market vary notably across major cities.
“In Sydney, we find the most evidence that the market may be overheating,” the group said.
“We attribute this to a combination of factors including the low level of interest rates, an undersupply of housing, increased investor activity and perhaps some irrational exuberance which may have taken hold,” it said.
The report highlighted that Melbourne is also showing “some slightly worrying signs”.
“However, we expect that the flood of new apartments should dampen property prices over the next several years,” it said.
“Indeed, recent data for Sydney and Melbourne suggest that the housing market may be cooling.”
Vanguard noted that in, after several years of construction, the city now faces an oversupply of housing, and house prices have started to fall.
“Looking ahead, our main fear for the housing market is a hard landing where house prices and investment fall by more than 10 per cent,” the group said.
“This would probably only occur due to a large external shock. For the time being, we attach only a small probability to such an event, but we acknowledge that a hard landing would have a strong negative impact on GDP.”
In the event of a moderate slowdown, Vanguard estimates that housing investment would contract by five per cent year-on-year and real GDP growth would slow to 0.6 per cent.
However, in a 2008 US-style housing crash, housing investment would contract 21 per cent, pushing Australia into recession with real GDP growth contracting -0.9 per cent.
“The shock would be initially transmitted via weaker housing investment growth, followed by a slowdown in the consumption of durable goods such as homewares. In a hard landing, house prices would undoubtedly fall as well, which would have a negative wealth effect on households,” the report said.