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Home Price Growth To Slow But Not Crash

Housing price growth will slow over 2016 and 2017, but not slump, according to a prominent forecasting firm.

A new forecasting model constructed by Moody's Analytics points to price rises averaging 3.7 per cent across Australia this year, and 2.8 per cent next year.

That follows a much steeper 9.1 per cent rise in 2015.

"Our forecast reflects lower income growth as the Australian economy transitions away from mining-related investment, as well as the strong build-up of housing supply over the past two years," Moody's Analytics economist Alaistair Chan said.

The model is also used to estimate a fundamental value for housing, based on incomes, rents, and employment. But Moody's Analytics - not to be confused with ratings agency Moody's Investors Service - is careful to stress that overvaluation or undervaluation would not necessarily imply a correction is imminent.

And the degree of misalignment with fundamentals is sensitive to changes in the economic environment.

The Sydney market, for example, is estimated to be overvalued by 9.5 per cent at the moment, while Melbourne is overvalued by 23.3 per cent.

But if the Reserve Bank's cash rate were to be pushed back up to a normal level, assumed to be 4.5 per cent rather than the current 2.0 per cent, the Sydney market would be overvalued by 19.9 per cent and Melbourne would be 38.9 per cent above its fundamental value.

And that's even before factoring the worsening of income and employment caused by the rate hike.

The model uses housing price estimates from CoreLogic RP Data.

FORECAST PRICE CHANGES in 2016 and 2017

Sydney: +2.2 pct then +1.6 pct

Rest of NSW: +5.9 pct then +7.8 pct

Melbourne: +7.2 pct then +1.3 pct

Rest of Vic: +2.1 pct then +6.1 pct

Brisbane: +4.2 pct then +7.6 pct

Rest of Qld: +1.7 pct then +6.2 pct

Adelaide: +0.3 pct then +2.9 pct

Rest of SA: +5.6 pct then +6.4 pct

Perth: -0.1 pct then +5.1 pct

Rest of WA: -6.9 pct then +2.2 pct

Hobart: +6.6 pct then +7.5 pct

Darwin: -1.7 pct then +4.9 pct

ACT: +5.3 pct then +5.5 pct

Australia: +3.7 pct then +2.8 pct

VALUATION COMPARED TO FUNDAMENTALS

Sydney: +9.5 pct

Rest of NSW: +1.4 pct

Melbourne: +23.3 pct

Rest of Vic: +2.0 pct

Brisbane: -3.2 pct

Rest of Qld: -5.9 pct

Adelaide: -2.2 pct

Rest of SA: -0.8 pct

Perth: +1.1 pct

Rest of WA: -3.4 pct

Hobart: +4.6 pct

Darwin: -2.5 pct

ACT: +14.0 pct

Australia: +5.9 pct

Source: CoreLogic-Moody's Analytics Australian Forecast Home Value Index

AAP

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