NAB is now expecting the market to decline "a touch more" to show a small overall fall in 2018 and 2019 but is not expecting the housing market to crash.

Three months ago, NAB was expecting house prices to rise by 0.7 per cent in 2018 and apartment prices to decline 0.9 per cent over the year.

Investors pullback

Property price data from CoreLogic out on Monday underlined the current weakness in the Australian housing market, with the data series showing that capital city house prices fell almost 2 per cent across the five major capital city markets over the financial year that ended on June 30.

During the year, Sydney prices fell a steeper 4.5 per cent for the city's worst price performance since the global financial crisis in 2009. Nationally, prices fell 0.8 per cent over the year and 0.5 per cent over the final quarter, according to the CoreLogic Hedonic Home Value Index.

"We saw a pullback in investor activity, both foreign and domestic, over the last year as inevitably leading to price declines, given the importance of this group in the market in recent years," Sarah Hunter of BIS Economics said.

In May, Foreign Investment Review Board figures showed that proposed Chinese investment in Australian real estate of all kinds halved to $15.2 billion as internal capital controls and new taxes crimped demand.


"What we are more concerned about now, relative to three months ago, is the potential impact of new regulations around lending standards that may follow the conclusion of the royal commission," said Ms Hunter.

The royal commission into the financial services sector has swept a devastating path through the banking sector after it started hearing testimony several months ago, with bank lending practices drawing particular scrutiny.

'Strong population growth is preventing house prices from declining too far,' says Stephen Roberts at Laminar Capital. Andrew Quilty

Increasing risks

Lending standards have already been impacted by the royal commission, according to Capital Economics' Paul Dales.

That situation, along with a spike in overseas funding costs and a faster-than-expected fall in house prices over the past three months, has significantly increased the risks to future housing market performance, he believes.

The economist said that in his opinion it's now possible that prices could fall by another 5 per cent during the current financial year.

Others are not so bearish, however, expecting more moderate declines in a housing market that has climbed by 32 per cent on a national basis over the past five years, according to the CoreLogic data.


'We expect a cooling, not a collapse': Paul Bloxham, HSBC.

"We see national housing prices as likely to edge down slightly in 2018 and to be broadly flat in 2019. We expect a soft landing in the housing market. We expect a cooling, not a collapse," said Paul Bloxham at HSBC.

Commonwealth Bank's Michael Blythe is expecting prices to fall a bit further but is also optimistic that the market won't see a big drop from these levels.

The factors that historically drive large downward moves in housing, including rising unemployment and rising interest rates, are "either not present or still a fair way off", Mr Blythe argued.

Population growth key

According to the Financial Review economist survey for the final three months of fiscal 2018, economists are now not expecting the Reserve Bank of Australia to hike interest rates until fiscal 2019 at the earliest.

Lending standards have already been impacted by the Royal Commission, according to Capital Economics' Paul Dales. Louie Douvis

That's a marked change from three months ago, when economists had been pencilling in two interest rate hikes in that period.


Economists also underlined that Australia's population growth is expected to continue to support demand for housing in Australia.

"Strong population growth is preventing house prices from declining too far," commented Stephen Roberts at Laminar Capital.

However, if house prices do continue to slide, then Warryn Robertson, portfolio manager at Lazard, believes the damage could spread beyond the housing market.

The property market is key to how overseas investors view the Australian economy and forms part of their decision about whether they will lend to Australia and are happy to hold Australian dollars, he said.

If property prices continue to fall or if consumers stop spending and then house prices fall again, that could become a "really nasty cycle", he said.