House price growth is forecast to slow to a virtual standstill in Sydney, with much softer conditions also tipped for Melbourne and most other capital cities.
Economists at the National Australia Bank on Wednesday cut their growth forecasts for average capital city house prices in 2016 to 1 per cent, down from 2.3 per cent previously. They cited weaker conditions in all capitals, amid more restrictive bank lending to property investors and less interest from foreign buyers in most markets, except Queensland.
NAB sees real estate cooling off
Target drags down Wesfarmers earnings
Qantas cash splash
Windows 10 update bricks webcams
A new Reserve Bank target?
Meet some of Australia's highest paid executives
The irrepressible rise of the AUD
Part-time work - good or bad?
NAB sees real estate cooling off
The latest NAB survey of residential property developers, owners, agents and investors shows house prices will climb slightly, while apartment prices will fall as local investors and foreign buyers pull back.
The economists forecast Sydney house price growth would slow sharply in 2016 to a meagre 0.6 per cent, compared with double-digit growth in the last three years.
Melbourne house price growth is forecast to be 2 per cent, down from 11.7 per cent last year, while the bank tipped price falls of 3 per cent in Perth and 0.6 per cent in Hobart, and growth of just 0.2 per cent in Adelaide.
The report said Brisbane would post the strongest performance with expected price growth of 3 per cent, helped by stronger interest from foreign investors in contrast to other states.
In its first forecast of unit prices, NAB predicted price falls in most capital cities, with Sydney apartment prices tipped to fall 0.6 per cent and Melbourne unit prices to fall 3 per cent after a boom in construction.
The double-digit growth of past years has come to an end. Source: NAB
NAB also released survey figures that showed investors - foreign and local - were less active in the property market in the December quarter of 2015.
A key factor behind the softening market has been a crackdown on lending to property investors by banks, which last year tightened credit standards and demanded investors stump up bigger deposits.
Banks have switched their prime focus to owner-occupier borrowers, especially those able to stump up bigger deposits.
NAB group executive in charge of personal banking, Gavin Slater, said the price forecasts would not in themselves have a big impact on the bank's lending, but banks including NAB were especially focused on borrowers who were owner-occupiers and had loan-to-value ratios (LVR) of 80 per cent or lower.
"We have obviously had more appetite for growth at the 80 per cent and below LVR space," Mr Slater said. "Competition is as intense as it's ever been.. the owner-occupier space is where it is particularly sharp."
The bank's survey data showed softer interest from foreign investors was also taking some heat out of the market, especially in Melbourne and Sydney.
Foreign buyers retreat. Source: NAB
Foreign buyers' share of new housing sales in Victoria dropped to 16.4 per cent in the December quarter, from 25.2 per cent. In Sydney, the share of new properties bought by foreigners fell to 11.7 per cent, from 13.6 per cent.
NAB chief economist Alan Oster said Queensland bucked this trend, with overseas buyers' share of new property purchases rising to 20.9 per cent, from 17.7 per cent.
"It's still a very mature market, but coming off a little bit in Sydney and Melbourne, and they're starting to switch a little bit into Brisbane," Mr Oster said.
Despite the softer conditions, NAB said a "severe correction" in the housing market was a remote prospect, though the risks of this occurring had escalated in the last six months.
"A sharp correction will likely require an external catalyst, triggering a sharp deterioration in the local labour market and/or a wave of Chinese selling," the report said. "The other possible trigger - a large increase in interest rates - looks highly unlikely in the current environment."