Price growth ''likely to slow''

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Property price growth in Australia is expected to "slow in an underlying sense" over the next two years, according to the latest forecast by NAB Group Economics.

House prices increased at an unexpected rate during the second half of 2019, with Sydney and Melbourne leading the gains. In fact, quarterly figures from CoreLogic showed a 4% gain in overall house prices, with Sydney and Melbourne clocking an above-6% growth. On an annual basis, dwelling values in Australia rose by 2.3%.

"While prices have rebounded more strongly than expected in the second half of 2019, dwelling price growth will slow in an underlying sense in 2020 and 2021 in Sydney and Melbourne," NAB said.

Based on NAB's projections, Australia's overall price growth will hit 4% this year before slowing down to 2.5% in 2021.

"Low interest rates are expected to continue to provide support, as is the low level of unemployment and still healthy population growth in Sydney and Melbourne, however, affordability constraints will arise as prices reach their previous peak," NAB said.

Also read: Aussies more willing to buy a home

NAB’s price-growth expectations are consistent with the outlook of property professionals surveyed for NAB's Residential Property Index. The index climbed to its highest level in almost six years, with market sentiments turning positive in all states.

Western Australia received a significant improvement in market confidence. NAB said this could indicate an imminent recovery from its prolonged downturn.

Furthermore, Australia’s price growth is slated to overtake gains in rents for the first time in two years. NAB said this might result in compressed yields.

Of the concerns in the market, tight credit continues to be the top issue.

"Tight credit remains the biggest constraint on new housing development, and access to credit the biggest impediment for buyers of existing property, but property professionals indicated their impact on the market was less severe in the final quarter of 2019," NAB said.

With the bright outlook for prices due to the low interest-rate environment, should investors and buyers be worried about another property-price bubble?

A recent analysis by ING Australia said it remains unlikely that the Reserve Bank of Australia's decision to maintain and even lower cash rates would spur a property-price bubble.

"Unless we see some acceleration in the quarterly annualised growth rates, then there should be no need for this to present any constraint to further RBA easing, though it will be worth watching, and could require some action from the Australian Prudential Regulation Authority in terms of bank lending restrictions for property purchases," said Robert Carnell, chief economist and head of research for Asia Pacific at ING.

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