Domestic and foreign investors are beginning to turn away from Australia's housing market due to tighter government regulations.
A report by professional services company KPMG says the new measures, such as increased rates of stamp duty taxes on vacant property, have dampened the spirits of prospective investors and anticipates they will be less active in the market in the coming years.
KPMG chief economist Brendan Rynne said there was now evidence to suggest demand from Chinese property investors had softened in the past few months as a result of the policy changes.
A 50 per cent cap on the number of new developments sold to foreign investors included in May's federal budget is also a discouragement, alongside tightening currency controls in China, the report states.
Meanwhile, local investors will be hit by the Australian Prudential Regulation Authority's move to curb interest-only mortgages.
"We believe that monetary policy will start to tighten sooner rather than later," Mr Rynne said.
He said Sydney and Melbourne's median housing prices are overvalued by 14 and 8 per cent respectively, with investors a catalyst for the price surge in the last four years.
"We anticipate a cooling in price growth, and from next year prices will start to gradually come down," Mr Rynne said.
"While price are high now, they are still within known boundaries by historic standards."
