One of Australia's most experienced property analysts is forecasting continued double-digit price gains for Sydney and Melbourne property next year, increasing the risk of a 2018 bust.

Key points: Sydney and Melbourne housing estimated to be 40pc overvalued

Sydney and Melbourne housing estimated to be 40pc overvalued However, SQM forecasts another double-digit price gain in those cities next year

However, SQM forecasts another double-digit price gain in those cities next year Analyst warns of "hard landing" if financial regulators do not curb mortgage lending soon

Louis Christopher runs boutique property analysis firm SQM Research, based in Sydney.

His annual property outlook report for 2017 goes a long way to explaining why the Reserve Bank recently shifted its description of the housing markets in Sydney and Melbourne from growing "moderately" to "briskly".

"What we have noticed in very recent weeks is an acceleration, particularly in the Sydney housing market," he said.

"Our view is that this acceleration will continue, it will go well into 2017."

SQM is forecasting price growth over 2017 of between 11-16 per cent in Sydney and 10-15 per cent in Melbourne.

While this level of growth would still be lower than the peak of 19 per cent reached in Sydney in mid-2015, Mr Christopher said it will now occur in markets that he estimates are already massively overvalued.

"We think Sydney is up to 40 per cent overvalued, and Melbourne is recording a similar rate - in fact Melbourne is at its most overvalued point that we've ever recorded," he warned.

"To see price increases from this point will be a problem for the RBA in later 2017."

Action needed 'sooner rather than later' to cool market

SQM's base case scenario is that the Reserve Bank will not take any action, and the bank regulator APRA will also sit on its hands after having tightened a range of lending criteria over the past 18 months, especially for investors.

However, Mr Christopher said doing nothing is probably a dangerous course of action.

"It'd be wise to take some action sooner rather than later," he advised.

"I would've thought potentially putting in additional deposit requirements to purchase a home, in a worst case scenario perhaps having to lift interest rates might be required.

"What we suggest is that it's best to move sooner rather than later because, if there is no action, it could be a large issue in 2018 where potentially a hard landing could play out."

While other capital cities are not forecast to enjoy the same price growth in 2017 as Sydney and Melbourne, and are not as overvalued, ratings agency Standard & Poor's warned earlier this week that any large fall in Australia's two biggest property markets would reverberate around the nation.

Mr Christopher is not so pessimistic on that front, and is forecasting that 2017 might be the last year of price falls for the resources bust affected cities of Perth and Darwin.

He is predicting that Adelaide, Brisbane and Canberra will post moderate price rises, while Hobart may sneak just into double-digit growth.

Housing oversupply may hit Brisbane, Melbourne CBD prices

SQM Research also tackled the question of whether there is a looming oversupply in the major east coast capitals.

Despite repeated warnings of a severe apartment glut in Melbourne, SQM concludes that the city's nation-leading population growth is likely to soak up much of the new build.

For 2017, SQM predicts that 35,000 extra dwellings would be required in Melbourne if recent rates of population growth are maintained, with around 34,000 homes likely to be completed.

In 2018, SQM predicts a moderate excess of 3,000 homes being built.

Indeed, the mismatch between population growth and dwelling supply is predicted to be higher in Sydney, with a forecast oversupply of 4,000 dwellings next year, and 9,000 dwellings in 2018.

It is important to note that SQM's methodology looks at supply and population growth in a given year, not at the stock of housing overall, which means it does not consider whether there is an existing undersupply.

However, in terms of property price movements, an existing undersupply or oversupply should already be priced into markets, meaning that it is the amount of new stock versus population growth going forward that should direct market moves from current levels.

In that sense Brisbane is in the greatest danger, with a predicted oversupply of 8,000 homes next year and 9,000 in 2018, in a much smaller market than Sydney and Melbourne.

SQM Research is urging caution for investors, particularly in inner-city Melbourne and Brisbane apartments.

"There is a material oversupply event occurring in Brisbane's CBD and a looming one for Melbourne's CBD," the report warned.

"Potential buyers in these areas should wait until post-2018 where we believe there may be potential buying opportunities to purchase distressed real estate.

"Current consensus is that there might be a CBD apartment price correction of up to 25 per cent over the next two years."