The price growth for Australian houses will slow in 2015 to about 4%, Fitch Ratings has forecast.
Its Global Housing and Mortgage Outlook says an “affordability ceiling”, plus a potential interest rate rise in the medium term, will moderate the recent price growth.
Perth prices will not move, but prices in Sydney and Melbourne are forecast to rise between 3% and 4%.
House prices in Australian cities rose 8.9% in the 12 months to October 2014, it noted.
“However, the rate of growth has been slowing since it peaked at 11.5% in April,” the report added.
Price growth has been driven by continued record low interest rates and increasing investor demand in the Sydney and Melbourne markets. Annual growth rates to date have reflected a two- tiered market with the prices in Australia’s two largest cities outstripping other capital cities’ growth.
Fitch expects that house price growth will moderate to around 4% in Sydney and Melbourne as rental yields become compressed and the prospect of further capital growth lessens.
“Perth prices (3.4% annual) are expected to flatten as mining investment slows and prices in the other capital cities are expected to continue to grow at a moderate pace.”
Fitch Australia’s managing director of structured finance, Ben McCarthy, said housing affordability had reached its peak in Australia.
“People just can’t afford to pay much more for housing,” he told the Australian Financial Review.
“At 4% growth, prices will still rise higher than people’s incomes.”
Capital cities which have experienced strong house price growth in the past 24 months (Sydney 26.2%, Melbourne 17.4%) will continue to experience affordability pressure, he noted in the report.
Australian property is among the most expensive in the world on almost all metrics, the report says.
Housing debt as a percentage of disposable income was 137% in 2Q14, which has been increasing steadily from 130% since 2Q12.
Fitch expects lending net volumes to continue to grow as house prices increase at a moderate pace. Investment loan approvals are expected to continue to represent 50% of new lending (excluding. refinance loans) as investors compete with owner occupiers.
Existing borrowers are expected to be cautious with higher-than-average household savings being maintained.
It noted mortgage prepayments have been gradually increasing since the market low of 17.2% observed in March 2011 to 21.3% as at June 2014, according to the Fitch Dinkum Prime RMBS CPR.
This story originally appeared on Property Observer.