One of Australia's most experienced property analysts is forecasting continued double-digit price gains for Sydney and Melbourne property next year, increasing the risk of a 2018 bust.
Louis Christopher runs boutique property analysis firm SQM Research, based in Sydney.
His annual property outlook report for 2017 goes a long way to explaining why the Reserve Bank recently shifted its description of the housing markets in Sydney and Melbourne from growing "moderately" to "briskly".
"What we have noticed in very recent weeks is an acceleration, particularly in the Sydney housing market," he said.
"Our view is that this acceleration will continue, it will go well into 2017."
SQM is forecasting price growth over 2017 of between 11-16 per cent in Sydney and 10-15 per cent in Melbourne.
While this level of growth would still be lower than the peak of 19 per cent reached in Sydney in mid-2015, Mr Christopher said it will now occur in markets that he estimates are already massively overvalued.
"We think Sydney is up to 40 per cent overvalued, and Melbourne is recording a similar rate - in fact Melbourne is at its most overvalued point that we've ever recorded," he warned.
"To see price increases from this point will be a problem for the RBA in later 2017."
Action needed 'sooner rather than later' to cool market
SQM's base case scenario is that the Reserve Bank will not take any action, and the bank regulator APRA will also sit on its hands after having tightened a range of lending criteria over the past 18 months, especially for investors.
However, Mr Christopher said doing nothing is probably a dangerous course of action.
"It'd be wise to take some action sooner rather than later," he advised.
"I would've thought potentially putting in additional deposit requirements to purchase a home, in a worst case scenario perhaps having to lift interest rates might be required.
"What we suggest is that it's best to move sooner rather than later because, if there is no action, it could be a large issue in 2018 where potentially a hard landing could play out."
Mr Christopher is not so pessimistic on that front, and is forecasting that 2017 might be the last year of price falls for the resources bust affected cities of Perth and Darwin.
He is predicting that Adelaide, Brisbane and Canberra will post moderate price rises, while Hobart may sneak just into double-digit growth.
Housing oversupply may hit Brisbane, Melbourne CBD prices
SQM Research also tackled the question of whether there is a looming oversupply in the major east coast capitals.
Despite repeated warnings of a severe apartment glut in Melbourne, SQM concludes that the city's nation-leading population growth is likely to soak up much of the new build.
For 2017, SQM predicts that 35,000 extra dwellings would be required in Melbourne if recent rates of population growth are maintained, with around 34,000 homes likely to be completed.
In 2018, SQM predicts a moderate excess of 3,000 homes being built.
Indeed, the mismatch between population growth and dwelling supply is predicted to be higher in Sydney, with a forecast oversupply of 4,000 dwellings next year, and 9,000 dwellings in 2018.
In that sense Brisbane is in the greatest danger, with a predicted oversupply of 8,000 homes next year and 9,000 in 2018, in a much smaller market than Sydney and Melbourne.
