An interest rate cut would also ease the threat of an oversupply of new apartments in inner city areas as a contributing factor to falling prices, it says. "As this supply is delivered over the next few years, it may pressure rental levels and home prices," Morgan Stanley analysts wrote. "Longer term, we believe that the excess returns from residential property investment are dissipating, as the one-off positives from lower mortgage rates, rising household leverage and creation of dual-income households cannot be repeated." House prices have surged 15.2 per cent since the interest rate cut in November 2011, on Australian Bureau of Statistics data, and now sit at record highs. House prices rose by 1.7 per cent over the first three months of 2014, and are up 10.9 per cent over the year to date, according to the Australian Bureau of Statistics' house price index.

Morgan Stanley property analyst Lou Pirenc argues the oversupply of new apartments in 2014 will also have an effect on house prices in inner city areas, as Mirvac and the Goodman Group accelerate property lot delivery. During the past year, 81,000 apartments have been approved nationwide. This is almost twice the long-term average of 44,600. Mirvac is currently building 2000 new apartments in Green Square, Sydney, and have just acquired $144.2 million in future residential development projects across Sydney, Melbourne and Brisbane, projected to deliver 1400 property lots across the four cities. The Goodman Group has a massive 34,000 apartments in the pipeline courtesy of office and industrial space conversions, which could pose further risks to house prices according to Mr Pirenc. Buyers are also in a stronger position that last month, said RP Rismark analyst Tim Lawless.

"The level of discounting has risen slightly indicating that buyers have a slightly better position when negotiating on the contact price," he said. First home buyers will be hoping that these predictions bring a change of fortune, with many now exiting the market altogether as the properties they want move beyond reach. "There is an extremely low number of first home buyers active in the housing market currently," Mr Lawless said. Data from RP Rismark showed a 1.9 per cent decline in house prices in May following a tough federal budget and the impact of cooler weather. "Historically, housing market conditions have softened in April and May as the market rebalances from what is typically a seasonally strong first quarter and also as a results of cooler climatic conditions during the autumn and winter months," Mr Lawless said.

"Outside of the seasonality, we have been seeing signs that the housing market is at or approaching the peak of the growth cycle." RBA governor Glenn Stevens signalled at the last RBA board meeting on June 3 that interest rates are likely to remain unchanged for the next board meeting on July 1. Loading "On present indications, the most prudent course is likely to be a period of stability in interest rates," he said. The minute of the June meeting, released on Tuesday, underscored the board's view the RBA should continue with the "period of stability" in interest rates, which it has pursued for the past nine meetings.