Where HSBC sees Australian house prices heading in 2016-17

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Australian house prices are unlikely to rise any further this year, with gains set to slow even further in 2017.

However, they’re not likely to crash.

That’s the view of Paul Bloxham, HSBC’s Australia and New Zealand chief economist, who cites several factors that will likely keep a lid on house prices in the period ahead: tighter prudential settings, higher state taxes on foreign buyers and a significant boost to housing supply, particularly from high-density units.

Despite the recent acceleration in Sydney and Melbourne property prices, described by Bloxham as “somewhat surprising”, he expects that tighter lending standards, particularly to investors, will add to price headwinds in the 18 months ahead.

“Prudential oversight of bank lending has stepped up significantly since late 2014, when the authority asked banks to slow growth in their mortgage lending to investors,” suggests Bloxham.

“As a result, investor credit growth has slowed to well below the 10% y-o-y ceiling, which was breached in early to mid-2015, before tighter lending standards saw it slow down to single-digit growth rates. This was initially offset by increased lending to owner-occupiers, but owner-occupier borrowing has also slowed recently.

“Given that prudential standards remain tight, we do not expect a strong rebound in local housing credit growth.”

He also suggests that tighter macroprudential measures could be introduced if there is renewed acceleration in investor borrowing.

Alongside an expected slowdown in housing credit, he suggests that recent increases in state taxes on foreign property purchases, along with tighter lending restrictions from local lenders, could also stymie price gains.

“A number of the local banks have recently introduced restrictions on lending to foreign buyers without Australian-sourced income,” he says.

“State governments have also introduced new taxes on foreign buyers. In mid-2015, Victoria brought in a 3% stamp duty surcharge, which is set to increase to 7% in July 2016. New South Wales and Queensland will also bring in surcharges of 4% and 3%, respectively.”

Given the steep growth in foreign property ownership seen in recent years, as shown in the chart below, it will be interesting to see whether these increased costs will have an impact on foreign demand, particularly should the Australian dollar continue to fall, effectively subsidising those using foreign currency to fund their property investment.

The final factor that Bloxham suggests will weigh on property price growth is perhaps the most contentious: rapid growth in housing supply, especially from units.

“Dwelling approvals reached an annual total of 240,000 in late 2015 and, although they have slowed a little since then, are still around historically high levels,” says Bloxham.

“Although there has been a strong ramp-up in apartment construction, we are yet to reach the point of balance in the national housing market. Over the next 18 months or so, though, our estimates suggest that the market will reach balance. This should help to contain further housing price growth.”

As a result of the large increase in high-density housing supply, Bloxham suggests that “an apparent oversupply in the apartment markets in Brisbane and Melbourne may see some unit price declines in these cities”. For detached housing, he forecasts that they “will continue to see modest price gains”.

Earlier this week the Australian Bureau of Statistics released its quarterly residential property price index, something that revealed high-density housing prices fell in the first three months of the year, including in Australia’s largest housing markets, Sydney and Melbourne.

Although Bloxham is of the view that house price gains will cool in the 18 months ahead, with pockets of weakness likely in some inner city areas, he is not of the view that a substantial price decline, or crash as it is frequently referred to in Australia, will occur.

“Our central case remains that Australia‚Äôs housing boom, which has been running for four years, will end with a soft landing,” he says.

“The housing market will cool over coming quarters. We are forecasting national housing price growth to slow from 9% in 2015 to around 4-5% in 2016 and 0-5% in 2017.”

Here are HSBC’s forecasts for capital city house prices for this year and next.

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