Australia's housing market is expected to witness a decline in house prices in the next year before clocking a slow and gradual recovery, according to the latest projection from m3property.

The study said demand will likely moderate over the rest of the year as migration slows down.

"Following the announcement of the COVID-19 pandemic, borders were closed, and net interstate and overseas migration forecasts were significantly impacted," the study said.

In fact, m3property forecasts Australia to record an overall population growth of 207,000 over the year to June 2021, significantly lower than the pre-COVID-19 projection of 220,00 people.

"Demand is likely to be weak in FY2021 due to economic uncertainty resulting in many people putting investment and house purchasing decisions on hold," it said.

In terms of supply, New South Wales, Queensland, and Western Australia are expected to be in oversupply over the rest of the year. By 2021, all states except Victoria are predicted to be in a supply glut.

The table below shows the supply forecast for each state in the next three financial years:

Victoria is expected to be undersupplied over the next three years

Given these factors, m3property anticipates prices to decrease, with a recovery not occurring until the latter half of 2021.

House prices, so far, have yet to see a significant decline, although dwelling prices in May reflected a slight decline of 0.4%, according to CoreLogic's house value index.

While the low-rate environment and the several support schemes are likely to prevent a surge in distressed sales in the short-term, m3property said the fate of the market depends on how the economic wheels would turn.

"Once mortgage breaks end and unemployment impacts are known, dwellings may start to be offered to the market at discounted prices, it negatively impacting prices. The length of the crisis is going to determine the depth of the downturn," it said.

Victoria and New South Wales are slated to register the deepest cut in house prices at 5% to 10%. Weak market conditions in these states are expected to last for 12 to 18 months. By 2023, New South Wales could see the strongest prices gains at 6% to 8%, while Victoria could record gains of 4% to 7%.

The table below shows the projected price movements in each state over the next three years:

Prices are expected to decline in all states by 2021, before posting a recovery by 2023