Rising supply and weakening investor demand will play an increasing role in the price outlook of Australia's capital cities over the next three years.
Falling interest rates won't be enough to drive growth, says BIS Shrapnel, with median house and unit prices across all capital cities forecast to be lower in real terms by 2019.
BIS Shrapnel senior manager and study author Angie Zigomanis says the rate of price growth in Sydney and Melbourne slowed in 2015/16.
Zigomanis says investor demand drove the upturn in both markets, with heavier regulation on bank lending initiated by Australian Prudential Regulation Authority (APRA) in 2015 then causing an investor pull back.
"National population growth in 2014/15 was at its second lowest level since 2005/06, with net overseas migration falling from 229,400 persons in 2011/12, to 176,500 persons in 2014/15 - although there have been wide variations across the states," says Zigomanis.
"Nevertheless, with the majority of net overseas migration classified as 'long term overseas visitors' - that is, temporary but not permanent arrivals - this reduction is likely to be impacting most on the rental, and therefore apartment, sector."
Zigomanis says dwelling completions are now rising to 'record levels' with 220,000 projects commencing in 2015/16.
All states with the exception of New South Wales will move into oversupply, according to the Residential Property Prosects 2016 to 2019 report.
"In fact, nearly all capital cities are building apartments at record rates on the back of the recent strength in investor demand," he says.
"As these projects are progressively completed, it is likely that there will not be enough tenants in a number of cities to support rents and consequently values upon completion.
"With the price pressure of the stock deficiency of recent years being steadily alleviated, BIS Shrapnel expects all markets to steadily weaken and bottom out over 2017/18 and 2018/19, with house prices largely flat or in decline over this period."
BIS Shrapnel advises the best prospects for median house price growth over the next three years are Brisbane and Hobart, followed by Canberra.
Construction has been concentrated in Brisbane's apartment market, so there's an 'underlying deficiency' of detached housing.
Meanwhile, Tasmanians are migrating to their capital for jobs, and Canberra's relatively higher incomes will drive growth in Australia's political capital.
Perth, Darwin and Adelaide, cities which weren't at the receiving end of the boom in any case, will continue to be impacted by dwindling industry, weak population growth and excess supply.
Despite all this, BIS Shrapnel claims unemployment is unlikely to deteriorate overall because the economy should 'trundle along at current rates of growth'.
Likewise, there should be 'few forced sales' in this period because of lower interest rates.
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