Leading property industry analyst, BIS Shrapnel expects the momentum in price growth in the residential property market to sustain till next year. This momentum, which emerged in 2013-14, is expected to continue to support prices through 2014-15 and to a lesser extent in 2015-16.

In its Residential Property Prospects, 2014 to 2017 report, BIS Shrapnel forecasts that prices will be impacted by rising construction and the potential for oversupply in many markets, combined with tightening interest rates, which will potentially create conditions for price declines by 2016-17.

According to the report, tight markets and low interest rates have been driving the Sydney, Melbourne, Perth and Darwin markets over the past 12 months, and are also behind the emerging upturn in Brisbane.

BIS Shrapnel senior manager and study author, Mr Angie Zigomanis observes that although prices have been rising in a number of capital cities, affordability at current interest rates is sufficiently attractive to maintain further price growth for now. He explains that the current standard variable rate of 5.95 per cent is outside of the GFC emergency low interest rates in 2009, with the result that affordability in most capital cities remains at early-2000s levels, which should support price growth.

While the low interest rates have had minimal impact on first home buyer demand, which has weakened considerably with the removal of incentives for established dwellings in favour of targeted incentives for new dwellings, this weakness has been more than compensated for by the strength of ‘next time buyers’ and investors. The increase in net overseas migration from a low of 180,200 in 2010-11 to 244,400 in 2012-13 has seen a corresponding rise in rental demand, placing pressure on many capital city markets and helping to underpin price growth.

Although price rises are expected to continue, the rate of rise will be varied across the capital cities during this time.

The strongest conditions are forecast for New South Wales and Queensland, where BIS Shrapnel estimates significant shortage in availability. The rate of price growth in Melbourne is expected to slow in response to rising new supply and emerging affordability pressures, while rapidly weakening economies in Western Australia and the Northern Territory will cause price growth to also slow in Perth and Darwin. With limited dwelling deficiencies, or oversupplies, the markets in South Australia, Tasmania and Australian Capital Territory are expected to remain relatively flat.

The change in gears from resource investment to domestic demand driving the economy will be slow, and is expected to have a positive effect on the economy and employment later in 2015. While this will support house prices to some extent, it will also signal the beginning of a tightening in interest rate policy. Zigomanis says the Reserve Bank is expected to enter a tightening phase towards the end of 2015; while initial rises are likely to have a limited effect with a strengthening economy, further rises will more significantly impact on affordability and prices through calendar 2016.

Variable rates are forecast to peak at just over seven per cent by the end of 2016, and will be sufficient to strain affordability, particularly in Sydney and Melbourne.

The current rise in purchaser activity and prices is driving an increase in new dwelling construction. New dwellings commencing in 2013-14 have been pegged at 184,400 and 190,000 in 2014-15 with multi-unit dwellings increasing by 43 per cent to a record of almost 80,000 dwellings in 2013-14. Once completed, these dwellings will erode stock deficiencies in most states.

BIS Shrapnel expects all markets to weaken by 2016-17 with the level of weakness depending on any persisting dwelling deficiency and how far affordability is strained with peaking interest rates.

Brisbane is expected to have the strongest price growth over the next three years with significant improvement in affordability. Sydney’s momentum is also forecast to continue thanks to existing dwelling deficiency. However, new dwelling supply will ease demand pressures; combined with rising interest rates that will strain affordability, price decline is forecast by 2016-17.

As dwellings under development move to completion, the increased supply in the market is expected to impact price growth in Melbourne, Adelaide, Canberra and Hobart. The Perth and Darwin markets are also forecast to progressively weaken and prices may even eventually fall as resource sector investment continues to weaken, impacting local economic conditions.

By June 2017, only the Brisbane and Sydney markets are expected to experience any growth in house prices in real terms over the previous three years, with all remaining capital cities recording real price declines.