House price gains are expected to slow although prices are unlikely to fall in the near-term, an investment bank says.
UBS economists and strategists say house price growth will moderate but should not move into a significantly negative phase while interest rates stay low and unemployment remains relatively benign.
It says there is some risk of oversupply hitting the housing market around 2017, which has not been an issue since at least the early 1990s recession, but it would only be in pockets of high density space in Sydney and Melbourne inner city areas.
Even then, foreign demand for new property may keep the balance of demand in excess of available supply.
"We think the likely persistence of record low interest rates, combined with an ongoing surge of foreign demand, means there is more likely to be a moderation of activity and prices growth, rather than a sharp drop-off," they said in research reports.
UBS forecasts house price growth to moderate to six per cent by the end of 2015 and slow to three per cent in 2016.
House prices rose by nine per cent in the year to April, led by a 15 per cent jump in Sydney.
"Given that rate cuts are more likely than rate hikes over the coming year, and the labour market is proving resilient, albeit we still expected unemployment to increase again to 6.5 per cent, we doubt that house prices will fall in the near-term," the reports said.
House prices are growing much faster than household income but UBS says as that is being offset by rates falling to record lows, a proxy measure of housing affordability. The mortgage repayment share of household income remains around average.
"While house prices are expensive on many measures affordability is not overly stretched at current very low interest rates," UBS says.
"The catalyst for a significant house price correction from either rising interest rates, a significant rise in unemployment or clear housing oversupply, all appear absent at this stage."
The federal government is cracking down on foreign investment in housing but UBS says the policy changes are likely to only modestly diminish the otherwise strong underlying foreign demand for Australian housing.
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