Housing prices in Sydney and Melbourne are tipped to fall by as much as 4 per cent this year, according to the latest report from property analysis firm SQM Research.

This is a major reversal of its previously rosy forecast — that Australia's two priciest cities would see their prices surge by at least 4 to 8 per cent.

SQM says the Sydney and Melbourne property markets are overvalued by at least 45 per cent, based on its comparison of nominal aggregate incomes to housing prices.

It expects "this overvaluation to wind down somewhat over an extended period of time".

Its new downgraded forecasts for five capital cities are:

Sydney -4 to 0 per cent

-4 to 0 per cent Melbourne -3 to 1 per cent

-3 to 1 per cent Darwin -5 to 0 per cent

-5 to 0 per cent Brisbane 0 to 3 per cent

0 to 3 per cent Canberra 1 to 4 per cent

But its forecast for Adelaide (0 to 4 per cent), Hobart (8 to 13 per cent) and Perth (1 to 4 per cent) remains unchanged.

SQM previously forecast Sydney and Melbourne prices would surge in 2018, but now expects them to drop or remain flat (at best). ( SQM Research )

Not expecting a 'housing crash'

SQM now expects prices across Australia's capitals, on average, to fall by 2 per cent (at worst), or increase by 2 per cent (in the best case scenario) this year.

The firm's managing director and author of the report, Louis Christopher, believes tighter lending standards to reduce borrowing risks "is now affecting the national housing market as a whole".

"This action, predominantly targeted at property investors, has triggered a decline in demand for residential property."

But he stressed that SQM was not expecting a "general housing price crash" in 2018 since the economy is overall "healthy".

In particular, he said this was due to "relatively low and stable" unemployment (at 5.5 per cent in March) and population growth being "very strong".

Even if the downturn becomes more pronounced SQM believes the Reserve Bank plus the state and federal governments would intervene to "stabilise the market".

Sydney and Melbourne market deteriorates

There were several major indicators which caused SQM to revise its initially rosy forecast.

"Leading indicators such as auction clearance rates, total aggregated property listings and asking prices suggest further deterioration in market conditions in recent weeks," Mr Christopher said.

The number of Sydney property listings has surged by 34 per cent over the year. He noted they are "now at similar levels recorded in 2011 — a point in time when Sydney dwelling prices fell 3 per cent for the year".

Despite that, Sydney's auction clearance rates have fallen to the low-to-mid 50 per cent range, Mr Christopher observed.

He said "the clearance rate may have dropped further to below 50 per cent" in late April.

"These are levels which, historically, have translated into price falls."

Sydney vendors have also had to capitulate and lower their asking prices (-1.1pc for houses, and -0.6pc for units), which will likely lead to a "negative pricing result" for the June quarter.

Mr Christopher observed weaker trends in the Melbourne market, but said it was "a little stronger than Sydney".

"Asking prices, after rising at year-on-year levels of up to 22 per cent, have slowed in pace to an annualised rate of 5 to 7 per cent."

Brisbane and Darwin downgrade

Brisbane — which was expected to see housing prices rise by 3 to 7 per cent — is now headed for a 0 to 3 per cent gain at best, according to SQM.

"Building approvals [in Brisbane] are falling and this will eventually help absorption levels of existing surplus stock," Mr Christopher said.

"However, given the slow investor take up, it will take many months before the market returns ... to equilibrium."

The worst-performing city is Darwin, which is expected to fall by up to 5 per cent, and remain flat at best.

Darwin has already suffered a four-year housing downturn and SQM believes there is still room for prices to fall even further.

Vacancy rates lifted unexpectedly in the March quarter, a time when vacancies usually fall, while Darwin's rents have fallen sharply since their peak (down by 31 per cent for houses, and 45 per cent for units).

Furthermore, the number of Darwin property owners listing their properties for sale has more than doubled (to 2,089 properties) since the lows recorded prior to the downturn.