Global banking giant Citi believes time is nearly up on Australia's apartment building boom, with a glut of supply over the next two years likely to trigger a drop in prices.

The bank's research team is predicting that, unlike many previous housing cycles, it will be oversupply, and not a rise in interest rates, that brings the boom to an end.

"Housing cycles usually end with monetary policy being tightened. But this monetary policy easing cycle is longer than normal with the latest rate cut only this month," the bank's economists observed.

"Low rates therefore will provide continued support for the housing cycle into next year, both for new construction and renovations, although lending conditions have tightened."

Citi said housing starts have reached a record 230,000 over the past 12 months and, while detached house construction is running around record levels, apartment building has smashed previous highs.

The bank expects the number of starts to fall to 205,000 next year and 172,000 in 2018.

The Citi housing clock puts the market at just over an hour to midnight. ( Citi )

However, the party is not over just yet, and the bank has set its housing clock to just before 11:00pm, where midnight is the turning point where building peaks and prices start falling.

"Apartment completions lag starts by 1-2 years so the developing oversupply will continue to build into 2017 and 2018 with completions probably doubling across the eastern states," the research note argued.

According to Citi's equity analysts, that presents another couple of good years for builders and building materials, but risks are already rising for banks, developers and the hotel sector.

Settlement risk looms large for developers, banks

The main threat for developers, and also a big worry for banks, is settlement risk - that is where an off-the-plan apartment buyer who has put down a deposit does not complete the purchase when construction is finished.

Even though developers can chase off-the-plan purchasers for the full contract price of the unit, with many buyers located overseas there is great uncertainty about how successful these pursuits will be.

Mirvac sales by buyer origin, with 27pc sold to overseas purchasers.

If a glut of apartments is sending prices downward, it is possible developers, and potentially their lenders, will be left out of pocket.

With oversupply a key element in triggering the price falls that would increase settlement risk, Citi has identified some hotspots of concern.

It said Brisbane is already in oversupply, especially in and around the CBD, while Melbourne is well on the way, with the risk of oversupply concentrated near the city.

Sydney has a lot more apartments in the pipeline and relatively less under construction. ( Citi )

While Sydney as a whole is less at risk of seeing supply exceed demand, Citi warned that the Botany council area is in particular danger of excess supply, with Auburn, Lane Cove and Ryde also at some risk.

Citi said that oversupply is seeing rents stagnate or even fall, and may result in home prices following.

"The combination of large rises in house prices over the past few years in Sydney and Melbourne and gradually increasing housing supply relative to demand has seen rising vacancy rates, softer rents and record low rental yields," the analysts noted.

"At some point a correction in house prices could follow."

However, the bank said low interest rates, more restrained detached house building and solid population growth should mean any home price falls are moderate.

Likely to be 12-24 months before unit prices fall

It is also expecting any price declines to be a little way off.

"There is a 12-24 month lag to completions and so far the level of dwelling completions is only about half the level of starts across the three eastern states," Citi observed.

"This suggests that the peak in new supply wouldn't occur until late next year.

"It will be then that the downward pressure on apartment prices should become more apparent."

While low interest rates are likely to soften any blow to home prices by propping up demand and reducing the level of forced sales, perversely, Citi said those low rates are contributing to the weak inflation that they are supposed to be boosting.

"Rental inflation is around multi-decade lows and could ease further as dwelling completions have a long way to rise yet," the bank noted.

"In addition, new dwelling purchases costs in the CPI [consumer price index] are not rising as fast as might have been expected given the surge construction activity."

Aside from companies affected by settlement risks, and property buyers who see the value of their purchase slide, Citi analysts warn that hotels could end up being the big losers out of the inner-city apartment glut.

With the rise of Airbnb, many of the CBD apartments struggling to find buyers or tenants may end up as short-term and holiday rentals, competing for business with traditional hotels.