"Despite the headwinds facing the housing market through the second half of 2015, we see little significant downside risk to the housing market outlook in 2016. That is not to say house prices won't fall. They may," ANZ's senior economist, David Cannington and economist Daniel Gradwell said.
Auction clearance rates across the country have continued to slide with Sydney taking the lead. Sydney clearance rates have fallen to below 60 per cent from a high of 90 per cent in April.
ANZ said the overall Australian market is not overvalued because salary and wages were still growing and interest rates were at record lows.
It is forecasting a 3 per cent price rise for NSW, 3.2 for Victoria, 2 in Queensland and an overall 2.8 per cent for Australia.
ANZ's predictions are more modest against SQM Research's 4 to 9 per cent price growth in Sydney for 2016 and 8 to 13 per cent for Melbourne.
ANZ said "The housing shortage remains high, but strong building activity and slower population growth will limit gains."
But foreign buyers would continue to soak up stock in Australia as foreign interest in Australian housing remained strong especially in Sydney and Melbourne, ANZ added.
A lower Australian dollar and ample apartment stock would continue to lure foreign buyers.
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