Inner Melbourne and Brisbane to be hardest hit as Citi sees property prices falling 7 percent

Citi says its sees property prices falling by as much as 7 percent as the housing boom unwinds by 2018.

Lending curbs will hit and household debt will be lowered, according to Citi, with the hardest hit potentially being apartments in inner-city Brisbane and Melbourne.

The forecast from Citi came in a 47-page analysis addressing tighter lending standards, higher lending rates, reduced foreign investment and increased supply relative to demand.

Sentiment towards real estate compared with lowering debt had "soured" even before the latest efforts by the Australian Prudential Regulation Authority to rein in lending to investors, according to the Citi analysts.

"APRA's tightening measures probably contributed to the April prices result, but Easter and school holidays may also have contributed to the slowdown," the Citi analysts wrote.

"Given the stretched house price valuations in Sydney and Melbourne some correction would seem likely as supply continues to catch up to demand.

"The largest price falls would be higher rise, inner city apartments in Brisbane and Melbourne given their greater potential for oversupply.

"Either way, we aren't expecting large enough price falls to trigger a downturn in the economy, but the downside risks have risen as house prices and household debt have continued to increase briskly."

The Citi modelling advised if APRA succeeds "ultimately we see some mild deleveraging, there could be a partial correction in house prices during the course of the next two years.

"This would be the case even if population growth remained strong."