• The NSW government’s budget, released on Tuesday, suggests it does not expect regulators to step in to manage the state’s hot property market.
• While last week the RBA voiced concerns about unsustainable price growth, experts say it’s unlikely it will take action this year.
• “Annual house price growth is expected to peak around late 2021,” the budget papers state.
• Visit Business Insider Australia’s homepage for more stories.

Revenue forecasts out of the recent NSW budget could be impacted by the increasing prospect of Sydney’s runaway housing boom being slowed by regulatory action.

The budget follows a bumper year of property price growth. House prices have jumped by more than 20% in Sydney since the beginning of the pandemic, a factor that has provided massive economic benefits for the NSW government.

However, warnings that regulators could attempt to take the heat off to prevent investors pushing the market out of control could have a significant impact on future income for the state.

A major intervention in the property market would prompt a downward revision to house prices, the papers report; a correction that could have major implications for economic outlook.

The NSW budget papers, released on Tuesday, show the state’s deficit, which was previously predicted to hit $16 billion, has halved to $7.8 billion in 2021.

However it is forecast to increase to $8.6 billion in the next year as a result of further stimulus and spending measures in response to the pandemic.

The property boom, including higher auction clearance rates and rising prices drove a $1 billion increase in the expected haul from transfer duty in the 2020-21.

But the NSW Treasury’s base scenario is for a fall off of $1.7 billion in transfer duty over the next two years, suggesting it expects the housing market to slow over the coming months.

It also highlighted the danger of an earlier, more direct intervention and banks toughening up on lending due to prompting from regulators looms as the main risk.

“More recently, investor activity has begun to gather pace, meaning the potential impact of prudential tightening is not insignificant,” the budget papers said.

On June 17 Business Insider Australia reported regulators were looking at a possible intervention, citing risks posed by the surging property market.

In a public address, the Reserve Bank of Australia (RBA) gave the strongest indication it would potentially intercede in the seemingly limitless upward thrust of the Australian property market.

The RBA expressed alarm at the pace of new lending as buyers struggled to keep up with the hot market, and indicated it was actively weighing up what steps it could take in response.

“I don’t think it’s in the country’s interests to have an extended period where credit growth is running way ahead of growth in our incomes, particularly given the high levels of debt,” Governor Philip Lowe said at the time.

“We’re not at the point where we’re actively considering implementing any initiatives in this area, but we’re doing the preparation for what might happen, what we might do if credit growth was accelerating.”

The NSW budget forecasts that “annual house price growth is expected to peak around late 2021.”

As higher prices encourage more owners to sell, this will work to limit house price growth over time.”

In addition, this is expected to “price out more potential buyers, weighing on demand,” the budget papers said.

While they noted that speculation had emerged around the potential for renewed tightening by regulators in response to growing house prices, NSW Treasury argued this could be staved off while property investors were kept at bay.

“The concentration of lending growth in owner-occupied loans rather than investors suggests current market conditions are less likely to evoke a response from regulators,” it said.

Max Harris, credit advisor at Azura Financial, a finance brokerage in Double Bay that provides mortgage advisory services, told Business Insider Australia he didn’t expect to see regulators step in around the property market in 2021.

Interest rates “are expected to increase over the longer term as inflation pressures continue to rise,” Harris said.

However he said that “in the short term, even in the next six months, it’s likely that we might see another rate cut from the RBA, down from 0.1 to 0,” he said, as the economy requires stimulus to recover.

Harris said he expects property prices to remain at their current levels, “simply because the interest rates are going to remain at these levels.”

The Commonwealth Bank economics team forecast on Wednesday that interest rates would rise as soon as next year, two years earlier than the current stance of the RBA.

If accurate, the path higher would return interest rates to a level not seen since June 2019, raising them higher than even before the pandemic.

“Our central scenario has the RBA delivering the first hike in the cash rate in November 2022,” it stated.

Follow Business Insider Australia on Facebook, Twitter, LinkedIn, and Instagram.