House price growth to slow

House prices will not fall though, and rents are tipped to continue to rise because of a lack of supply, BIS Shrapnel says in its Residential Property Prospects, 2010 to 2013 report.

BIS senior project manager Angie Zigomanis said first home buyer activity has dropped after the expiry of the first home owner's grant boost at the end of 2009.

Affordability has also suffered as interest rates rise off their low levels, he says.

"With interest rates quickly lifting from these emergency levels, and the current variable rate of 7.4 per cent now being close to long term trends, the recent levels of price growth cannot be maintained," Mr Zigomanis said.

Investors will replace some of the demand lost as a result of those factors, meaning house prices will continue to grow, BIS says.

More moderate interest rate movements than recent months will also aid purchaser confidence, it says.

BIS forecasts the cash rate to rise by 50 basis points in the 2010/11 financial year and by another 50 basis points in 2011/12.

"The more stable interest rate environment is expected to underpin purchaser confidence as economic conditions continue to strengthen, and shouldcontinue to push through moderate house prices rises," Mr Zigomanis said.

House price growth is likely to remain at an average in the mid-single digit percentage range over the next three years, he says.

On a capital city basis, Sydney and Perth are expected to post the strongest growth in house prices in the coming years.

Weaker demand and local economic conditions are expected to lead to more moderate price growth in Brisbane, Hobart and Canberra.

Melbourne and Darwin have already experienced very strong price rises and low affordability will limit further rises, BIS says.

For renters, the shortage of dwellings will keep pressure on rents.

"Even though overseas migration inflows are steadily easing, a deficiency of stock is still in place with dwelling construction below underlying demand," Mr Zigomanis said.