Property prices in Sydney appear to be at turning point with Melbourne, perhaps, not far behind.
What happens next is the $7.4 trillion question - the combined value of Australia's 9.9 million residential dwellings - with more than half of that value in Sydney and Melbourne.
Over the past five years, prices in Sydney have clocked an average annualised rate of more than 11 per cent and by more than 9 per cent in Melbourne.
But the worm is turning. CoreLogic figures show that while Sydney prices are up more than 7 per cent over the past year, they are down over the past 3 months, albeit by less than 1 per cent.
Price growth in Melbourne is slowing. While prices in the southern capital are up by more than 10 per cent over the past 12 months the growth has slowed to under 2 per cent over the past quarter.
The Australian Prudential and Regulation Authority's actions aimed at slowing the banks's lending to property investors are working with a marked slowdown in investor borrowing and improved access to finance for first home buyers.
After years of being a sellers' market there are signs that Sydney, at least, may be about to become a buyers' market.
Despite being well into the spring selling season, auction clearance rates are falling in Sydney and flat in Melbourne.
Auction clearance rates are a leading indicator of where property prices are heading.
Buyers' market
Sellers are less optimistic about prices they will fetch in Sydney while the optimism of sellers is holding up in Melbourne, according to a survey of more than 3000 sellers by OpenAgent, a site that matches real estate agents with sellers, buyers and renters.
Marta Higuera, OpenAgent co-founder, says the survey confirms that Sydney's property price confidence has been slowly eroding since the beginning of the year.
Long-time property market analyst Louis Christopher, the managing director of specialist property researcher SQM Research, has modelled a "base" case that would see Sydney prices grow by at least 4 per cent during 2018 and Melbourne prices to grow by at least 7 per cent.
The base case assumes no interest rate rises and no further action by the Australian Prudential Regulation Authority during 2018 to further slow the growth of property investor lending.
However, on Christopher's estimates, if interest rates were to rise by 0.5 percentage point during the second half of next year, the minimum rise in Sydney prices would be 3 per cent instead of 4 per cent.
The minimum rise in prices in Melbourne would be 5 per cent instead of 7 per cent under the 0.5 percentage point rise scenario.
Shane Oliver, the chief economist at AMP Capital Investors, continues to expect a 5 to 10 per cent fall in Sydney and Melbourne, over the next two years - maybe less in Melbourne given its strong population growth.
However, a crash is unlikely, as the Australian property market is a lot more complicated than a doomsday scenario requires, he says.
First of all, only Sydney and Melbourne have seen sustained and rapid price gains in recent years, he says.
Prices have risen over the past year in the other major cities by less than 5 per cent, with falls in Perth and Darwin.
"To get a housing crash - say a 20 per cent fall or more - we probably need much higher unemployment, much higher interest rates and/or a big oversupply, but it's hard to see these," Oliver says.
Apartments
However, the prices performances of houses and apartments in Sydney and Melbourne could be quite different.
The latest Housing Outlook Report for 2017-20, produced by BIS Oxford Economics for insurer QBE, forecasts apartment prices on Australia's east coast cities (including Brisbane) will fall between 4 and 7 per cent by 2020.
With higher interest rates and lower loan-to-value ratios for investor lending, capacity for investors to enter the market or pay higher prices is limited, the report says.
Other factors that could help to at least keep a lid on apartment prices, include NSW doubling its foreign-buyer surcharge to 8 per cent.
Though,offsetting that to some extent, NSW has also abolished stamp duty for first timers who buy new and existing homes worth up to $650,000.
Last year, Victoria more than doubled the foreign-buyer stamp duty surcharge from 3 to 7 per cent.
And from July 1 this this year, stamp duty was axed for first home buyers in Victoria on purchases of up to $600,000, whether new or established, with stamp duty discounts on purchases up to $750,000.
The QBE report forecasts Sydney apartment prices could decline a cumulative 4 per cent over the forecast period to June 2020.
Melbourne apartment prices are expected to decline a cumulative 5 per cent to June 2020. Brisbane unit prices could fall by 7 per cent, the report predicts.
Sydney house prices will fall by a cumulative 0.2 of a per cent over the forecast period.
However, Melbourne house prices are expected to increase a cumulative 10 per cent over the same period, the report says.
Caution needed as record-low rates will rise
Tim Lawless, the head of research at CoreLogic, says borrowers should exercise caution.
The household savings ratio is at a 5-year low and an increasing amount of debt is concentrated in residential mortgages, he says.
"Household budgets are already thinly stretched," he says.
"Household balance sheets will be tested when interest rates eventually start to rise," Lawless says.
He points out that retail spending is weak, wages growth is at record lows and energy costs are rising.
Lawless says an increase in the the cash rate would further dampen household consumption, potentially leading to slower economic growth and a softer jobs market.
