The forecast for house values is more robust. Capital Economics expects Sydney house price inflation to improve from here, returning to zero growth by later this year.

The slowdown is still working through the Melbourne house market, with prices, now up 5.3 per cent, to fall to negative 5 per cent by late 2018.

Negative 6pc nationwide

This week AMP Capital's chief economist Shane Oliver predicted residential property prices for the nation's two biggest cities to slip by about 5 per cent this year. The Capital Economics forecasts focus on the sales-to-new-listings ratio as a broader gauge of the balance between demand and supply which, Mr Dales wrote, has proved to be a better predictor of prices.

With more homes currently being listed each month than being sold, this ratio is consistent with house price inflation falling below zero in the next six months, he wrote in the research note.

Further ahead: Capital Economics expects property prices nationally may be 10 below their peak by late 2021

On that view, the high number of units being listed for sale relative to the number being sold each month suggests that apartment prices will fall harder than for single dwellings, from 2.6 per cent growth in March to negative 6 per cent nationally.

"Of course, no one single indicator can tell us exactly what is going to happen to house price inflation in the coming months and the sales-to-new-listings ratio tells us nothing about the next few years," Mr Dales wrote.


"But it does provide a better guide to the next six months than any other indicator and there are reasons to believe that further ahead demand will continue to weaken relative to supply."

Already, there are signs that some apartment developers are struggling to sell all their units. A South Yarra development by Malaysia's Gamuda Land has sold just 70 per cent of its units and has not yet made the project profitable.

Rates and taxes

In the CBD, Singapore's Fragrance is yet to find buyers for more than one-quarter of the apartments in one of central Melbourne's best-known apartment projects, the so-called Beyonce tower.

Already the number of new apartment project launches fell in 2017 nationally to around half the number in the previous year, on Urbis figures.

Looking further ahead, the Capital Economics analysis warns on the impact of a fresh credit crunch triggered by the banking royal commission, along with rising rates and the potential for tax changes with a new federal government.

"The risk is that the resulting weakening in demand relative to supply causes prices to fall faster in 2020 and 2021," Mr Dales wrote.

"By late 2021, prices for the combined capital cities may be about 10 per cent below their peak. But the price falls will probably be larger in Sydney and Melbourne and bigger for units than single dwellings."