House price growth in Sydney and Melbourne is set to halve over forthcoming months, according to the HSBC chief economist Paul Bloxham.
Sydney and Melbourne house prices grew 13 percent and 14 percent respectively in the year to May, with Bloxham expecting this to decline.
He suggests tighter lending standards, an oversupply of apartments and the escalation of the taxation of foreign buyers to weigh on the market.
He forecasts national growth to slow from the national 9 percent in 2015 to around 4 percent to 5 percent later this year.
The 2017 house price growth will be even slower - between 0 percent and 5 percent, he tips.
He said the re-acceleration of housing prices was "somewhat surprising, given continued tight lending standards and slowing credit growth."
Bloxham expects further tightening of lending standards should there be a strong pick-up in investor borrowing.
"A cooling of the housing market is expected to leave the RBA with room to consider cutting its cash rate further in coming quarters, if needed," he said in a note to clients obtained by Fairfax Media.
"Given the already strong gains in recent years in Sydney and Melbourne, the authorities have been seeking to cool the housing market in these cities."
Mr Bloxham points to solid demand from foreign buyers as one of the main causes for the impressive growth.
In particular, Chinese demand for Australian residential property has been a key driver in the recent fall of the Australian dollar against the yuan, offsetting the increase in Australian dollar-denominated housing prices since 2012.
"In short, Australian housing is just as cheap now for a Chinese buyer as it was four years ago and has become more affordable relative to property in most Chinese urban centres," says Mr Bloxham.
While it is difficult to measure the scale of foreign demand, statistics from the Foreign Investment Review Board suggest approvals have seen a sharp 20 per cent increase of total housing market turnover in 2014-15.
However, new stamp duty and land tax surcharges imposed on foreign buyers will be implemented in NSW, Queensland and Victoria, and are likely to stall foreign demand.
"Foreign purchases could partly explain the recent ramp-up in Sydney and Melbourne housing prices," says Mr Bloxham.
"We expect recent increased taxes and changes to local bank lending practices are likely to weaken this source of demand in coming quarters."
The oversupply of apartments will be the third factor prompting house price growth to halve by year's end, though Mr Bloxham concedes it won't happen for a while yet.
"Our estimates suggest that, although there has been a strong ramp-up in apartment construction, we are yet to reach the point of balance in the national housing market."
Bloxham points out apartments account for only 24 per cent of the national housing stock.
"We expect that apparent oversupply in the apartment markets in Brisbane and Melbourne may see some unit price declines in these cities, but we expect the detached housing market to continue to see modest price gains," says Mr Bloxham.