THE RESIDENTIAL market across Australia is in the grips of one of its worst affordability crises in more than two decades. Prices are expected to remain stagnant for the next five to seven years across much of the country. The sobering forecast comes in a recent report by leading analyst BIS Shrapnel. Robert Mellor, director of building and construction, said homeowners should expect a further slowing in residential property price growth over the next three years. The exceptions would be Brisbane, regional Queensland and regional New South Wales centres, which are expected to show modest growth. Although the resources boom has driven Perth housing prices up significantly over the past two years, Mr Mellor predicts that this won't continue. 'Perth and Darwin were the only capital cities to experience strong price rises in calendar 2005. The median house price in Perth has streaked ahead of all other capitals in recent years, riding on the wave of the resources boom. However, house prices are now on par with Melbourne and Brisbane, and growth cannot be sustained.' Mr Mellor also sounded a word of caution to investors considering the Sydney residential market. 'Sydney is currently the most expensive Australian capital and will significantly lag the national recovery, placing buyers in a very strong position to bargain. 'The Sydney market will experience another few years of price decreases before it begins to recover in 2008/09.' OUTLOOK BY REGION New South Wales Sydney house prices declined in 2004/05, following a 57 per cent rise between June 2001 and March 2004 which put houses out of reach of many buyers, according to BIS Shrapnel. With interest rates now on an upward trend, affordability is still a major concern and Mr Mellor expects prices to weaken further. The markets in Newcastle and Wollongong have also suffered declines over the past two years, although things are expected to improve gradually in these regions over the next three years as underlying demand remains strong relative to supply, and affordability continues to be more favourable than Sydney. Victoria Growth in the Melbourne median house price has slowed in the past two years as a considerable stock deficiency was absorbed and the net interstate migration inflow reverted to a small outflow. With underlying demand weakening slightly and the market fairly in balance, BIS Shrapnel expects price growth to be limited due to Melbourne house prices already being fully valued. Queensland Brisbane house prices have hit an affordability barrier after a period of extraordinary growth. Although there is still huge demand for housing in Brisbane, current high price levels are constraining growth. Despite this constriction, the median house price increased slightly in 2005/06 and it appears that Brisbane households are adjusting to higher price levels. While the economy remains strong, Mr Mellor expects a shortfall in housing supply to push prices up. The Gold Coast and Sunshine Coast markets have generally moved in tandem with Brisbane, and the median house price in both regions is expected to exhibit further growth in the next three years. South Australia Price growth in Adelaide has been reined in by an emerging oversupply of housing stock, according to BIS Shrapnel. An improvement in the Adelaide median house price will be minimal for the next two years, before picking up slightly in 2008/09. Western Australia Compared to the eastern capitals, Perth's median house price increased substantially in 2004/05 (+16 per cent) and the growth rate has accelerated to more than 20 per cent in 2005/06, due to strong underlying demand and a booming state economy. But Mr Mellor said: 'Affordability is clearly starting to become an issue. Perth's median house price has risen 113 per cent since 2001. We expect price growth will slow in 2006/07, rising only 3 per cent as the boom in the Western Australian economy moderates.' Tasmania Growth in the Hobart median house price slowed in 2004/05 after a 94 per cent increase in the two years to June 2004. The net interstate migration inflow has declined to almost zero and the median house price, while still expected to show improvements, will be more in line with the growth in other capitals. Australian Capital Territory Canberra's median house price has declined following a period of strong price growth, putting the capital's median house price on par with prices in Melbourne. BIS Shrapnel expects affordability and rising interest rates to limit price growth in the Canberra market. The Northern Territory Darwin's median house price jumped 24 per cent in 2003/04 and a further 10 per cent in 2004/05 due to the boom in oil and gas investment. BIS Shrapnel forecasts growth in the Darwin median house price to wind back significantly in 2006/07 in response to rate rises, with the slowing resources boom to cause a further easing in price growth in 2007/08.