Australia's east coast-centric housing boom will roll on in 2017 but could become unstuck in 2018, according to SQM Research founder Louis Christopher, arguably the country's most accurate forecaster.
Mr Christopher expects capital city house prices to rise between six and 10 per cent next year, led by double-digit price growth in Sydney, Melbourne and possibly Hobart. There will be single-digit growth in the other capital cities, apart from Perth and Darwin where further steep falls are predicted.
Looking ahead to 2018 the picture is gloomier, according to Mr Christopher. He believes both Sydney and Melbourne's housing markets will be "dangerously overheated and overvalued" by the end of 2017, paving the way for a possible correction.
"The market will sustain its current momentum and rise again in 2017 – 2018 may be well another matter."
The housing boom will roll on in 2017 but could come unstuck in 2018, according to arguably the country's most accurate forecaster. Cartoon Peter Nicholson
His forecasts are worth noting. Over the past two years Mr Christopher has predicted capital city house price growth in line with the Australian Bureau of Statistics's Residential Property Price Index.
He also correctly tipped Melbourne to be the strongest performing housing market ahead of Sydney. ABS figures show Melbourne prices up 6.9 per cent for the year to September, compared with 3.2 per cent growth in Sydney. Many economists, by contrast, got things wrong.
"Economists are like GPs of the medical world – good generalists but not specialists. This particularly hurts them when understanding the leading housing indicators," he told The Australian Financial Review.
Having spent the past 16 years analysing the dynamics of the housing market, firstly with Fairfax-owned Australian Property Monitors before founding SQM in 2006, Mr Christopher believes a number of key macro factors will continue to push up prices for at least another year.
These, he said, include the current low interest rate environment, continued strong population growth especially in Sydney and Melbourne and – until very recently – a weak response to the supply side of the housing market.
"We're getting around 90,000 new people coming to both Sydney and Melbourne every year. They all need accommodation and quite a lot of them have some home purchasing power.
"The Sydney and Melbourne economies have kept the country out of recession and there's a strong correlation between a city's economy and their housing market," Mr Christopher said.
His forecasts for 2017 are under a base case scenario of a steady economy, no changes to the cash rate, the Australian dollar hovering between 70¢ and 80¢ and no meddling in bank lending by the Australian Prudential Authority in the first six months of the year.
Should the Reserve Bank cut the cash rate again next year, house price growth could be even greater. "It is now very likely it will be a strong start to the new year for Sydney and Melbourne, given the way 2016 ended," Mr Christopher said.
Market leader CoreLogic's December 2016 Home Value Index, which came out on Tuesday, showed a bigger 10.9 per cent surge over the year with Sydney up 15.5 per cent, ahead of Melbourne, which rose 13.7 per cent.
Mr Christopher believes the CoreLogic index overstated price growth in Sydney and other markets – a claim also made by the Reserve Bank. "We benchmark our forecasts agains the ABS data," he said.
SQM monitors house price growth using its own Asking Price Index, which as its name describes monitors and analyses changes in the asking prices of homes. Its accuracy is based on the fact that nine out of 10 homes for sale in Australia include an asking price.
The SQM index had capital city house prices up 4.9 per cent last year with Melbourne and Hobart both managing double-digit growth.