Apartment markets in Melbourne and Brisbane face significant risks over coming years as a large volume of new supply is set to hit both areas at a time when demand appears to be faltering, according to the latest report.

Published by property industry trends forecaster Hotspotting, the No Go Zones report lists Melbourne and Brisbane as areas which investors would be best to avoid.

Areas of Sydney such as Paramatta as well as the Gold Coast were also good areas to steer clear of, the report says.

Report author and managing director Terry Ryder said areas such as Melbourne and Brisbane ranked as the worst places to invest of anywhere in Australia and were unlikely to provide the capital growth which investors were looking for.

“Generally, I would tell them that they should stay out of those markets,” Ryder said when asked about the approach which investors should adopt with regard to the high-rise markets of Melbourne and Brisbane.

“Looking across Australia, there are many better places to invest.”

Throughout parts of Australia, apartment markets are likely to be challenged in coming years as record levels of development leads to a massive volume of new stock coming online.

In inner Melbourne alone (CBD and surrounds), ABS data indicates that almost 17,000 new multi-residential dwellings (townhouses, units, flats and apartments) were approved for construction over the two years to October 2016.

In inner Brisbane, that number is more than 9,500.

At the same time, previously red-hot demand particularly from overseas is dropping back amid efforts on the part of China to curb outbound investment and the adoption of tighter lending practices on the part of Australian banks.

The volume of sales in Melbourne, Ryder says, has been in decline on a quarter by quarter basis over the past three years.

That in places such as Brisbane and Parramatta are also in decline, he says.

Ryder says much of the impact will be felt when investor owners of much of the new stock set to come online go in search of tenants, who will be difficult to find amid the volume of supply on offer.

When that happens, he says vacancies will rise and rents and values will fall.

Ryder is not alone in his caution about some parts of the market.

In forecasts released in the middle of last year, for example, BIS Shrapnel says it expected apartment prices to fall by eight percent, six percent and five percent over the next three years in Melbourne, Brisbane and Sydney and for four percent declines to be observed in Canberra and Darwin.

CoreLogic senior analyst Cameron Kusher, meanwhile, has long warned about growing risks of settlement defaults on apartment purchases especially in Melbourne and Brisbane.

In addition to the volume of new stock coming online and tighter lending practices, Kusher says this risk of settlement defaults is being further exasperated by slower rates of capital growth compared with what many investors had anticipated and questions about whether or not some of these units had in fact been overpriced to begin with.

Whilst much attention revolves around inner city apartments, Ryder says there are signs of risk spreading to suburban markets in some cases.

In some suburbs of Melbourne for instance, a large number of apartments and town houses were going up whilst overbuilding of multi-units was also occurring in the northern suburbs of Brisbane and Parramatta was seeing high levels of development activity.

Ryder says it is important for investors to look beyond current vacancy rates and to think about the likely situation going forward.

“People need to look at current vacancy rates but they also need to go a step further,” he said.

“Sometimes, the current vacancy rates can appear to be acceptable but a year from now they could be very different.”

“They (investors) need to look at buildings approvals for the local government area. If there has been a big increase in the number of dwelling approvals in that area, that is an indicator that vacancies are likely to rise.”