AUSTRALIA’S property market is at its second most overvalued point on record and is teetering on the edge of a dangerous national housing bubble.

Louis Christopher of SQM Research said the national property market was overvalued by 22 per cent, which was only lower than 2003 when it hit 25 per cent.

He said the overvaluation was driven specifically by Sydney and Melbourne and that both capital cities had already entered bubble territory.

“If we were to rip out (the figures for) Sydney and Melbourne the market would be fairly valued, quite frankly,’’ Mr Christopher said.

“The current tempo has picked up particularly in Sydney. Melbourne has had about 15 per cent per annum price gains, I know that is a little bit higher at what the official numbers suggest but it is our view that, that is what the market has done. And our expectation is that the current trends will continue well into next year.’’

Melbourne had hit its highest overvaluation level of 40 per cent and Sydney was at its second highest level of overvaluation at 40 per cent as well.

“It is not a good situation, it is going to make for a sticky situation for the RBA to deal with going forward.’’

In his latest Boom and Bust report, Mr Christopher warned if the Reserve Bank of Australia didn’t lift interest rates or encourage the Australian Prudential Regulation Authority to clamp down on home lending, the national market could enter bubble territory.

If no changes were made, which he believed was the likely scenario, Mr Christopher forecast Sydney property prices to rise by between 11 per cent and 16 per cent in 2017 while Melbourne would rise between 10 per cent and 15 per cent.

Hobart values would increase between 7 per cent and 12 per cent, Brisbane between 3 per cent and 7 per cent, Adelaide between 2 per cent and 4 per cent, and Canberra between 3 per cent and 7 per cent.

The report predicted values in Perth would drop between 8 per cent and 4 per cent and drop in Darwin between 9 per cent and 5 per cent.

“However it is likely 2017 will be the last year of price falls generated by the mining downturn for these cities,’’ he said.

Mr Christopher said if interest rates were to be cut again dwelling prices would rise even further, leading to markets, particularly in Sydney and Melbourne, becoming “dangerously overvalued’’ and paving the way for a possible correction in 2018.

“Failure to do so will result in double digit national housing price growth in 2017 driven by about of control Sydney and Melbourne housing market.’’

Analysing how the capital city markets had performed so far this year, Mr Christopher said Perth now had more properties for sale than Sydney.

Prices dropped by 5 per cent in the past 12 months with signals that perhaps there could be an acceleration of the downtrend.

Mr Christopher said there was not much happening in the Adelaide market and he didn’t predict much would next year.

“There are no rises, there are no falls. It is just flat for both the sale market and the rental market.’’

He said 2016 was a boom year for Melbourne property value wise.

“And if our forecasts are right for next year, the Melbourne market will be very dangerous. Any price pushes beyond these current levels heighten the risk of a sharp correction or a very long downturn period.’’

The report described the Hobart housing market as “set to explode’’.

“Indeed the market is already on the move, Listings are rapidly falling, recording the largest falls of any capital city in the country, year on year.’’

But he warned it may not be a long term play and how shallow the market could be in a downturn.

Darwin’s long term outlook was promising and it was good to see yields rising again, he said.

Canberra had officially moved into recovery with evidence of price rises and a tightening rental market.

The report said in Sydney it was “almost impossible’ to find a fairly valued property right now.

“If there is any value at all to be found it is on the regions just beyond Sydney that have not yet boomed but will likely go through a catch up phase.’’

Mr Christopher said he would like to believe the Brisbane market was set to take off.

“But until we see the leading indicators improve we are not quite ready to be very bullish on the city.’’