National Australia Bank has raised its forecasts for Sydney and Melbourne house prices in 2016 after a surprisingly strong first half, but it believes the market will slow to a near standstill next year.
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NAB economists on Friday published forecasts for an 8.6 per cent gain in Sydney house prices over this calendar year, and a 6.1 per cent lift in Melbourne.
That compares with forecasts in April that prices in Sydney would rise 1.5 per cent this year, and 2.3 per cent in Melbourne.
The lift is mainly the result of strong growth in prices in the first six months of the year, which the bank says is unlikely to continue.
"Over the last six months, Sydney and Melbourne prices have increased by an annualised rate of nearly 19 per cent and 12 per cent respectively," NAB's chief economist, Alan Oster, said.
"However, while there is significant amount of uncertainty over the outlook for prices, we expect that this renewed momentum in the housing market is unlikely to be sustained over the longer term."
The forecasts, which are partly informed by a bank survey of buyers, come as NAB continues to predict a slowdown in the market next year.
Sydney house prices are forecast to rise by just 0.2 per cent in 2017, with Melbourne prices edging up by 0.4 per cent.
However, the report argued the country was unlikely to experience a severe "correction" in house prices - a fall of 10 per cent or more - unless unemployment jumps or interest rates rise sharply.
The report said the impact of May's cut in interest rates would "soon fade", and tighter rules on bank lending and affordability constraints would drag on demand for property.
"NAB is forecasting a much softer residential property market, with 0.5 per cent growth in house prices and nearly 2 per cent decline in unit prices in 2017," Mr Oster said.
Nationally, NAB's economists also lifted their forecasts for house prices, to 5.1 per cent , from 1.5 per cent previously.
Amid some predictions of an oversupply of apartments in parts of Sydney, Melbourne and Brisbane, unit prices were tipped to rise by an average of 3.6 per cent across capital cities, before falling 1.9 per cent next year.
One reason for the growth in Sydney and Melbourne prices in recent years has been an influx of overseas property investment, analysts say, but NAB's survey said foreign buyers' share of the market fell for the third quarter in a row, to 10.4 per cent.
There was still a "significant amount of uncertainty" around the outlook for prices, it said, nothing that any further cuts in interest rates could put extra upward pressure on property prices.
