Houses in Melbourne are overvalued but don't expect a massive correction any time soon.

Melbourne property is the country’s most overvalued but there’s no crash on the horizon, a new report suggests.

House prices in Melbourne are 23 per cent overvalued and have appreciated “far beyond what income and rental growth suggest is appropriate”, according to the CoreLogic-Moody’s Analytics Australia Home Value Index released on Thursday.

From mid-2017 to early 2019, house prices are expected to be in a period of “near-stagnation”, declining at a rate of 0.2 per cent per quarter, the report found.

For the next year and a half, prices are expected to increase 2.3 per cent, CoreLogic head of research Tim Lawless said.

“We’re not seeing [Melbourne prices] falling off a cliff,” Mr Lawless said, noting it’s “what the doctor ordered” after a housing boom.

The era of boom and bust is behind us and we’ll move into a period of slower growth.Andrew Wilson, Domain Group

Melbourne’s drops are largely due to a “glut” of apartments being completed, with 252,000 extra dwellings approved over 2012 to 2015.

New apartments are largely concentrated in the inner city, but a softer labour market would also have an effect, he said.

“Conditions in Melbourne are again expected to outperform Sydney this year, with values forecast to rise by 7.2 per cent in 2016, before slipping back to just 1.3 per cent growth in 2017,” he said.

Nationally, a slowdown in house price growth was noted in the report, while Melbourne would be in an “extended period of sluggishness” as Sydney experienced a rebound in late-2016.

Melbourne’s sluggish period will see house prices decline until 2019. Graphic: CoreLogic, Moody’s Analyics

Moody’s Analytics chief international economist Ruth Stroppiana said a slowdown “after such impressive growth in recent years” was not “surprising or concerning”.

Melbourne had recorded strong building activity in the past few years, with a recent slowing in apartment construction, but it would take some years for the full effects of the building boom to be felt, Ms Stroppiana said.

Domain Group senior economist Andrew Wilson said forecasting more than six months ahead in the current climate is difficult, but argued Melbourne is the “most balanced and robust” capital city in the country.

“The era of boom and bust is behind us and we’ll move into a period of slower growth,” Dr Wilson said.

“But there are dark clouds gathering, with changes to [negative gearing] on the horizon,” he said.

“If these changes come to fruition then all bets are off.”

The report expected the trend of falling prices in Perth to continue, followed by a modest recovery of 4.6 per cent in 2016.

Perth’s housing market should stage the beginning of a recovery in 2017. Graphic: CoreLogic, Moody’s Analytics

In early-February, NAB Group chief economist Alan Oster indicated a weakening of the fundamentals in property markets across Australia, saying the “best of the price gains are probably behind us”.

NAB’s forecasts tipped Melbourne house prices to increase 2 per cent over 2016, while Sydney was expected to increase just 0.6 per cent over the year.

Apartment prices were expected to fall in Melbourne and Sydney by 3 per cent and 0.6 per cent respectively over 2016.

The CoreLogic-Moody’s Analytics report uses the CoreLogic hedonic indices and Moody’s Analytics econometric modelling to create 10-year forecasts for Australia’s capital cities.