Property investors are being warned to tread carefully amid fears that overinflated house prices could drop in some areas, leaving them high and dry.
The Reserve Bank on has fired warning shots about the continued strength of investor activity, which has driven property prices to record highs, particularly in Sydney and Melbourne.
It fears the run-up in property prices could rewind sharply later on with damaging consequences for all households - a sentiment echoed by economists and industry experts.
"It's a period of tread with caution, certainly in Melbourne and Sydney," said Ben Kingsley, chair of the Property Investment Professionals of Australia.
"Those market places are in a hyper state and when you've got a hyper state like that, we tend to give back some of the gains that we make."
Fear of missing out on the booming market has seen investors bidding properties to prices beyond their market value, Mr Kingsley said. When property prices in a particular area exceed what the locals there can afford, they become unsustainable, and price rewinds are likely, he said.
A balanced market should comprise 70 per cent owner-occupiers and 30 per cent investors, Mr Kingsley said.
But in NSW, investors account for more than 50 per cent of all new lending and have done consistently since April 2013, CoreLogic RP Data senior research analyst Cameron Kusher said.
And, with rental returns stagnating, most of them are clearly chasing capital growth, which isn't a sound long-term investment strategy, he said.
"I think you could see a 10 per cent drop in prices potentially once the boom ends, like what we saw back in 2004/05 in Sydney - that's definitely a possibility," Mr Kusher said.
The risks are especially high in inner city areas, where investors are paying exorbitant prices for new units where massive amounts of other new units are being built.
"If the market slows, if you do need to actually sell quickly, it could be very hard to dispose of those properties," he said.
CommSec economist Savanth Sebastian said some areas of Sydney and Melbourne could end up like Canberra, which currently is suffering a mild correction thanks to a housing oversupply.
"(Canberra) has already started to feel the heat of what the RBA thinks will be more forthcoming in places like inner city Melbourne," Mr Sebastian said.
But, in Sydney, the risks have less to do with oversupply and more to do with booming house prices, driven higher by investors.
"That price growth is not sustainable and I think anyone investing in the Sydney market needs to understand that there's going to be a period of consolidation," he said.