Sydney home prices to plateau: HSBC

Sydney's stellar run of double-digit home price growth looks set to run out of steam in 2016.

HSBC Australia chief economist Paul Bloxham says he expects the Reserve Bank to hike interest rates next year, a move that will cool Sydney's booming property market.

Sydney property prices surged a whopping 12.4 per cent in 2014, according to the CoreLogic RP Data home value index.Credit: Fairfax

"Sydney house prices are running at an unsustainable pace," he said.

"Purchasers need to be very careful, because at some point there has to be some correction."

HSBC is forecasting Sydney house prices to be broadly flat in 2016 rather than suffer a big fall.

"The more Sydney house prices go up, the more likely it is that they will have to correct, and that's not necessarily a bubble," Mr Bloxham said.

Sydney property prices surged a whopping 12.4 per cent in 2014, according to the CoreLogic RP Data home value index.

The market has continued its strong run into 2015, with prices up three per cent in March alone.

With the Reserve Bank tipped to cut interest rates later in 2015, prices could rise even further.

Mr Bloxham said a cut to the RBA's cash rate from its record low of 2.25 per cent would help boost the sluggish economy, but there was a risk it could overheat the Sydney and Melbourne housing markets.

One alternative to boosting growth, he said, was for the federal government to postpone its attempt to balance the budget until 2016/17 when the economy will likely be stronger.

"The government tried to tighten up fiscal policy last year when the mining boom was over," he said.

"When growth in the economy is sluggish, that is not the time to tighten fiscal policy."

Mr Bloxham is confident the government has learnt its lesson from last year when a harsh round of budget measures were a blow to consumer confidence and retail spending.

"I do think we're likely to see that this year's budget will likely to be less damaging to confidence than we saw last year," he said.

"I think we will see a bit more support for the economy from the fiscal situation, we certainly should see a bit more support."

HSBC is forecasting economic growth to increase to three per cent next year, from the 2.5 per cent pace of 2014, and says commodity prices are not likely to fall much further in 2015.

AAP