House price growth looks set for continued slowdown next year despite the record low interest rates.
High-profile economist Saul Eslake from Bank of America Merrill Lynch predicts house price inflation to decelerate further next year.
Real wage and income weakness are holding back economic growth according to Mr Eslake, and he said the slowdown in house prices are weighing on construction activity.
New home construction is one of the driving forces of growth currently in the presence of the resource boom slow-down.
“It is our view that national median dwelling-price growth will decelerate markedly in 2015,” he wrote.
“This is as household income growth and sentiment remain soft, the unemployment rate rises, affordability deteriorates and the stimulatory impact of low interest rates fades.”
Mr Eslake said the slowdown would bring house price inflation down to a level similar to income growth and mortgage rates – around 4%.
“The Reserve Bank of Australia for one has been extolling the role that increases in house prices have been playing in supporting both consumer spending and residential construction,” he said.
“If house price growth decelerates and perhaps even declines in real terms this could weigh on consumption and dwelling investment into 2015,” he said.
Recent economic data show a decline in real wages and subdued business and consumer sentiment. Also, the value of investor loans in September was greater than the value of loans to owner-occupiers for the first time in the Australian Bureau of Statistic’s 30-year history of the housing finance series.
Driven by interest rate cuts, finance approvals for investment loans hace jumped 68 per cent since 2009.
Mr Eslake said these investor figures were driving a build-up of risks in the housing market.
“The latest data from the Australian Tax Office for 2011-12 suggests that 19 per cent, or around one in five, Australian taxpayers is a landlord,” he said.
“And of this, around 13 per cent of these taxpayers are taking advantage of negative gearing.”
“Therefore these landlords are relying on capital gains to offset income losses.”
“This is a strategy subsidised by the government, but it may not be a good one if dwelling prices don’t rise,” he said.