BIS Shrapnel senior manager of residential property Angie Zigomanis said investor demand has been a key driver in the upturn in both Sydney and Melbourne, but added that moves from the regulator to slow growth in bank lending to investors have seen investors retreat from their previous high levels in 2015-16.
The regulatory guidelines initiated by the Australian Prudential Regulation Authority (APRA) in 2015, he said, have resulted in tighter bank lending policy targeted at investors and have seen investor activity weaken across all states since the second half of 2015.
"In NSW and Victoria in particular, where the strength of investor demand has been a key driver of the Sydney and Melbourne residential markets respectively, the decline in investor activity has slowed the pace of price growth," he said.
As investor expectations of capital gains are reduced, investor demand is expected to weaken further, creating additional downward pressure on prices, particularly in the unit sector.
"At the same time, dwelling completions are rising to record levels and the increasing supply/demand imbalance will increasingly dampen price growth," said Mr Zigomanis.
"In particular, the boom in apartment construction over the last couple of years is creating a disconnect in the supply balance between detached houses and units, with a resulting difference in their price outlook."
The change in gears from resource investment to domestic demand driving the economy also continues to be slow and economic growth nationally is muted, he said.
"Without a substantial acceleration in economic conditions, employment and income growth will also be slow," he added.