Sydney property price set to drop

Sydney property prices are set to drop according to a new report. Photo / 123rf

Australia's property bubble looks set to finally burst, with house prices in Sydney forecast to drop for the next two years.

House and apartment prices in Sydney should drop by about five per cent by 2020, while Brisbane and Melbourne will experience weakening apartment markets.

It follows a period of enormous growth in Sydney, with median house prices jumping by 81 per cent in the last five years, the Daily Telegraph reports.

The latest report by BIS Oxford Economics predicts that Brisbane market will be worst hit, with apartment prices on track to drop 7 per cent by 2020.

BIS analyst Angie Zigomanis said a decline in interest from investors struggling to secure home loans would be one of the driving factors behind the property slump.

"A tighter lending environment will affect Sydney more than anywhere else because that's where the bulk of investors were buying and where they put in the highest price offers," Mr Zigomanis said.

It means home buyers will move from paying investor prices to owner-occupier prices.

Whether or not the overheated Sydney and Melbourne housing markets constitute a "bubble", prices are more likely to decline gradually than sharply over the next few years.

That's the view of KPMG chief economist Brendan Rynne, who expects investor demand will be tempered by tighter prudential rules and an eventual rise in interest rates.

He estimates median house prices are overvalued in Sydney (14 per cent) and Melbourne (8 per cent) but still within historical boundaries.

"Our forecasts show Sydney will experience a greater adjustment than Melbourne in the next few years, but this is likely to be gradual rather than a collapse," Mr Rynne says in a new analysis on Wednesday.

"This has happened before in Australia and prices have returned to equilibrium without the sort of crash we have seen in other countries after the GFC. We expect the same again to happen here now."

Will it happen here?

The latest data shows property prices are still increasing across New Zealand, however prices in the heated Auckland market appear to be slowing.

Auckland house prices have fallen during the last three months as buyer demand slips and investor activity plummets nationwide, figures from May showed.

LVR restrictions and higher building costs were creditted with slowing rapdily rising prices in the country's largest city.