Regulatory pressure on mortgage lending and soaring house prices in Sydney and Melbourne are likely to dampen property transaction volumes in 2017.
However the value of new mortgage lending is expected to rise by between one and five per cent in the year, with home prices in capital cities set to rise, though at a slower pace, a survey of lenders by Deloitte shows.
Regulatory pressures, such as APRA's cap of 10 per cent annual growth in new loans to investors and more selective lending is already impacting the market, and could further moderate price growth, Deloitte's annual Australian Mortgage report found.
"There was a bump in investor lending in 2016 that is still working through this year, there is increased differential pricing in the market and the tightening of lending criteria will continue," Deloitte's financial services partner James Hickey said.
"While fundamentals are still supporting current prices, there will be a moderation."
In 2016, total new lending was steady from the prior year at $384 billion, due mainly to the curbs on investor lending which resulted in multiple out-of-cycle interest rate hikes.
But auction clearance rates have rebounded in recent months, fuelled by strong demand from investors looking to take advantage of record low interest rates, even with tightened lending criteria.
The central bank and federal government this month said they are considering options to help first home buyers break into a property market dominated by investors.
Participants in the survey, which included lenders and broker groups, indicated that further regulatory action putting pressure on prices counted as the biggest concern for the mortgage market in 2017.
The report found affordability is becoming a key concern as prices continue to climb at a much faster pace than incomes.
In Sydney, the house price-to-annual income ratio stands at 8.4 times, in Melbourne at 7.2 times, while it is 6.2 times in Adelaide.
Banks are continuing to offer steep discounts of up to 100 basis points on standard variable rates to owner-occupiers, in order to protect market share, but loan discounts have tightened for investors, survey participants said.
The current pressure on net interest margins, the focus on profitability over volumes and regulatory scrutiny is likely to result in lenders scaling back the discounts, according to the report.