House prices in Australia will still climb in 2018 -- but only just -- before picking up steam in 2019, according to new research by ANZ.
The findings are based on a model developed by ANZ economists David Plank and Jack Chambers, which aims to provide a better indication on the long-term direction of Australian house prices.
Plank and Chambers said data on auction clearance rates and credit growth are useful leading indicators, but such methods are better suited to short-term predictions of three to four months.
"According to the model, housing price growth will trough at around 1% per year in the second quarter of 2018, growing around 2% per year for the year as a whole," the pair said.
"However, this slowdown is unlikely to persist as the model forecasts that growth will accelerate to around 4% per year in 2019."
It's a more optimistic view than the 0-3% falls forecast by UBS economists in December, although most would agree the double-digit percentage returns of recent years are unlikely to be repeated soon.
Forecasts for house price growth have become a hot topic, with recent data revealing a noticable slowdown in Australia's major housing markets.
Plank and Chambers said that over the long-term, population growth will underpin Australian house prices regardless of shifts in the economic cycle.
Data from the ABS shows Australia's population is growing at the fastest rate in three years, largely driven by overseas migration.
And domestically, 2017 saw a surge in interstate migration to Victoria -- which perhaps goes some way to explaining yesterday's huge spike in approvals for Victoria apartment construction.
Last month, Capital Economics chief economist Paul Dales said Australia's housing market can't rely on population growth to boost prices. But Plank and Chambers said it was the most statistically significant variable in determining fundamental value.
The pair then included an equation comprised of three key drivers of short-term value:
1. The error correction term: The difference between actual dwelling prices and the fundamental value estimated in the first step – because prices tend to revert to their fundamental value over time.
2. The lagged growth rate of dwelling prices: To account for the momentum that typifies housing price movements.
3. Changes in dwelling investment, gross total incomes and the average mortgage rate: To capture the effect of economic conditions -- i.e. demand and supply.
A historical model dated back to 1995 revealed a strong correlation with the actual rate of house price growth in Australia.
So out of the short-term variables Plank and Chambers plugged into their model, the pair said higher mortgage rates will be the main drag on prices in the short term.
They added that increased supply will weigh on prices in the first half of the year, as 2017 construction projects near completion.
"Roughly 200,000 dwellings are now under construction, which is enough oncoming supply to dampen price growth," they said.
Income growth is unlikely to have a big impact on house prices, although the two economists are confident the next wage price index on February 21 will show positive signs for wage growth.
But if that doesn't happen, and wage growth misses the mark, it simply means the RBA will likely slow the pace of interest rate hikes -- which would in turn be a net positive for housing, the pair said.
"Overall, the model supports our view that while nation-wide growth in housing prices will slow in 2018, prices will not fall," they said.