Australian home prices could slide if the construction boom continues and population growth slows, a leading economist warns.
HSBC Australia chief economist Paul Bloxham says while a national oversupply of housing seems unlikely in the near term, it could be a risk late in 2016 and going into 2017.
"Slowing population growth has begun to raise questions about whether supply could eventually exceed demand, leaving Australia with too many houses," he said.
"If we were to build too many houses it would clearly be a significant downside risk to housing prices."
Mr Bloxham said it is for this reason that the Reserve Bank should not cut the cash rate further, because its would encourage even more construction.
"To us it seems that the costs of further cuts are likely to outweigh the benefits," he said.
"Much better to let the Aussie dollar do the work for them."
Mr Bloxham said while a national oversupply of housing is some way off, it could happen in certain markets, such as high rise apartments in Melbourne.
"Australia did not build many houses when the mining boom was at its height and had an accumulated housing undersupply," he said.
"It is clear that the recent ramp-up in housing supply means the cumulative housing deficit is diminishing. Our estimates see the national housing market in balance by 2017."
HSBC estimates that Victoria is at most risk oversupply, while NSW and Queensland will have an undersupply of housing for some time yet.
"Slower population growth and even stronger construction poses the risk that certain parts of the market may become oversupplied," Mr Bloxham said.
While there are accurate measures on the number of homes being built, Mr Bloxham said measuring the number of households is much less exact because it not only depends on population growth but also the number of people in each home.
So while the number of building approvals has been slowing, measuring the slowing population growth and the change in the size of households is the unknown factor.
"The number of people per household adjusts to keep demand in line with supply," he said.
"For example, when there is insufficient supply of housing at a reasonable price, young people may choose to live in their family home for longer."
