"The pipeline [of apartments] yet to be built is still immense, there's a huge amount of cranes up over the city and the vacancy rate is now above its long-term average and rising," Dr Oliver said.

Sydney's vacancy rate jumped to 3.2 per cent in November, according to SQM research, while the long-term average sits at 2.2 per cent.

Apartment-heavy areas of Sydney - "big chunks of the west and the lower north shore" - were most at risk, Dr Oliver said.

Declines in the sharemarket could also start to weigh on the eastern suburbs as well if investors and those working in financial services "felt less well off and less inclined to trade up or invest in property," he said.

APRA's recent removal of the cap on interest-only investor lending highlighted that authorities were becoming increasingly nervous about the property downturn, he said.

"If that credit easing, by removing the caps, doesn't work they might have to do other things and that points in the direction of an interest rate cut, although that's something we might see in the second half of next year," Dr Oliver said.

"Lower interest rates could become a supporting factor to the property market, but often interest rates take a while to get traction," he said.


Industry commentator Edwin Almeida, of Ribbon Property Consultants, has a more bearish outlook on the Sydney market anticipating a large drop-out of investors when the bulk of interest-only loans expire next year.

"In Sydney we are poised to see anywhere between a 12 and 15 per cent fall in the first half of 2019 and the reason why I'm saying this is we really haven't seen the investors [with interest-only loans] panic yet," Mr Almeida said.

"Regardless of the APRA move to increase the volume of interest-only loans (by removing the lending cap) the real issue is whether people can still get credit."

He said those investors having to refinance their loans next year would "get a rude shock" when their properties were revalued and they discovered they are worth much less than they were 12 or 18 months ago.

"That's one of the grenades that could play out in the first three months... it will be a litmus test to see what happens next," he added.