National Australia Bank (NAB), Australia’s fourth largest mortgage lender, has boosted its forecast for house price growth this year to 3.4%. The Melbourne-headquartered bank also expects apartment values to fall less than previously expected, saying further rate cuts would continue to stimulate the market.

NAB raised its prediction for standalone homes from 0.4% and narrowed the loss it expects on apartment prices to 0.8% from 1.6%, citing improved sentiment from real estate professionals. The bank also expects a continuation of 2016’s rate cut-driven demand, according to its latest Residential Property Index. 

As for the nation’s official cash rate, NAB expects the Reserve Bank to cut the benchmark cash rate from the current record low of 1.5% to 1% by the end of 2017 in response to weaker inflation and a lag in housing construction, which buoyed the economy last year.

“Most market commentators have been surprised by the strength in the Melbourne and Sydney property markets in the second half of 2016,” Riki Polygenis, NAB's head of Australian economics, told the Australian Financial Review.

“Because momentum is so strong, that's coming through in the survey in terms of the broad index that measures sentiment within the survey. We're still expecting a moderation in house prices going into 2017 but it is a modest revision upward from where we were.”

NAB dismissed the risk of a sharp or sudden drop in property prices, saying that would only happen if unemployment or interest rates surged, both of which were unlikely. However, even the revised figures represent a cooling from 2016’s capital city average of 11.6% growth for houses and 5.9% growth in apartment prices.

“Sydney and Melbourne will both see solid, albeit much slower, growth in prices, while Brisbane and Adelaide are forecast to cool a little,” the report. “Perth will remain very weak as house prices decline by another 2.7 per cent this year, as the market continues to feel headwinds from the mining sector, slower population growth and ample housing supply.”

Sydney, Adelaide, and Hobart would be the best performers when it comes to units. Unit prices are projected to fall 2.7% in Melbourne and 1.8% in Brisbane due to oversupply. The worst unit performer would be Perth, where apartment prices would likely fall by 3.8%.