"We'd expect that such a period could severely test Australians' long love affair with property investment." 'Market has lost its energy': Sydney enters spring with a whimper Credit:Erin Jonasson Record low interest rates have been in place for some time and, while this initially prompted new entrants into the property market, the extended period of these conditions has left few marginal buyers, who are more cautious than at the beginning of the cycle. While diminishing house price growth has not overly knocked household spending or confidence, the bank sees significant oversupply exacerbating the apartment sector in the coming 12-18 months, particularly in Brisbane and Melbourne's central districts. "This will likely be of concern to new investors in this market," the note reads.

"Yet this development is not expected to materially [affect] price performance of detached housing but may [hurt] sentiment towards the property market overall." Glenn Stevens. Credit:Christopher Pearce Though the bank expects these pockets of apartment price weakness to lead the further deceleration of price growth and building approvals, it doesn't expect this to spill over into the detached housing market, although prices will continue to decelerate over the course of the year. That said, the over-supply issue could take years to resolve, particularly as falling Australian immigration numbers slow population growth. Those with negatively geared investment properties (or those hoping to implement this strategy) may find they need to hold onto these properties for longer to realise adequate capital growth.

"In addition, over this period, they are likely to face regulatory risks from both sides of politics," said the bank, referring to taxation statistics suggesting that, among the 2 million landlords in 2013-2014, one in six individuals were eligible to pay tax, a potential target for government tax policy. However, thanks to the low interest rate environment, the average rental loss per landlord has declined from $11,000 in 2010-11 to $8700 in 2013-14. RBA governor Glenn Stevens remains relatively unconcerned that house price growth has slowed, stating last week that, "some moderation in house prices in some of the locations where they had been rising most rapidly, while not the direct objective of the supervisory measures, is also, in my judgment, helpful". The last time the RBA cut rates was in February and May of 2015, and Merrill Lynch argues the property market was one of the only beneficiaries, as price growth leapt in the following months.

Merrill Lynch thinks it unlikely the RBA will cut rates soon, unless a material rise in unemployment jolts the position of the Australian economy. "It is our view that only a material rise in the unemployment rate should force the RBA's hand - not a, likely transitory, deceleration of inflation or as an attempt to manage the exchange rate," the note reads. But it's the promise of a slowing growth asset that weighs on the bank's thinking. "If dwelling and in particular apartment price appreciation is difficult to come by over coming years, new investors may increasingly question the validity of their negatively geared investment," the bank says. As such, Merrill Lynch remains wary, citing high indebtedness combined with extraordinary monetary policy globally as the reason appetite for property may be diminishing.

Loading "With household income growth soft, the reduced ability to borrow, or at least no further extension of it, will weigh on prices," the bank says. "This most recent boom in dwelling prices is likely the last one we will experience for some time."