2016 will be a muted year for capital growth for Australian houses according to global credit rating agency Fitch Ratings, who is predicting price growth to be in single digits over the coming year.

Released yesterday, Fitch’s Global Housing and Mortgage Outlook 2016 report claims the next 12 months will see a softer real estate market, with house price growth predicted to pull back to around 2%, compared to the 7.8% seen during 2015.

Despite the slowdown in price growth, Fitch predicts there will likely be less activity this year from both investors and owner occupiers as decreased affordability and tighter rental yields take their toll.

“We expect the impact of decreasing affordability for owner occupiers to become evident over coming months, while a further compression of rental yields for investors will likely soften demand in the housing market, particularly in Sydney where the median house price is significantly higher than other Australian cities,” the report said.

“Fitch expects house price growth to moderate over the course of 2016 to around 2%, likely driven by growth moderating in Sydney and Melbourne.”

With Fitch predicting a slowdown in capital growth, buyers who have purchased houses recently likely did so near the top of the current cycle and therefore may struggle to service their debt over the coming year.

“Fitch’s expectation of only modest house price growth may add further pressure on the ability of borrowers to service debt,” the report said.

“This will be especially true for borrowers who have made recent purchases and those that have contributed minimum levels of equity; investment property borrowers may prove particularly sensitive to rising lending rates.”

There may be some relief for borrowers though, with Fitch predicting the Reserve Bank of Australia could lower the official cash rate sometime during 2016.

“Fitch does not anticipate an increase in the RBA policy rate in the near future, as the effect of increased capital charges on the overall funding costs for banks has already led to an increase in lending rates.

“The RBA is reluctant to cut rates, due to the already heated housing market; however, if weak external demand persists, combined with soft inflation and weaker wage growth, it may bow to pressure for a rate reduction in 2016.”

While affordability issues may pose some problems for the owner occupier market, Fitch does predict a slight growth in lending to those looking to buy their own home.

“Fitch expects moderate growth in lending for owner-occupiers, which will likely be supported by a forecasted GDP growth of 2.7% and a stable outlook for unemployment which is expected to remain between 5.8-6.5% throughout 2016.”