The areas in Sydney and Melbourne most at risk of apartment oversupply

• Analysis from Citi shows the Melbourne CBD is most at risk of apartment oversupply.

• While Sydney has more regions deemed at-risk, oversupply concerns aren’t as heightened as the key Melbourne trouble spots.

• The bank said new apartment approvals are likely to still exceed underlying demand until 2020.

---

Analysis from Citi shows the areas in Sydney and Melbourne most at risk from apartment oversupply.

The data shows that for Melbourne, supply risks are focused on the central CBD area:

Sydney has more areas that are vulnerable, although the risk of oversupply isn't as heightened in most areas.

For the Melbourne CBD, the number of new apartment approvals amounts to 12% of the total population. The highest area in Sydney is Strathfield, at around 6.5%:

The analysis is based on research from Macro Strategy Advisers, which calculates oversupply risks as a function of apartment approvals divided by the number of people in a given local government area (LGA).

LGAs are specifically defined boundaries maintained by the ABS. They are often used as the basis for statistical analysis by region.

The Citi analysts also noted that some Sydney LGAs are facing an apartment undersupply, "possibly reflecting a lack of suitable sites".

In addition, the supply increases in the Sydney market comprise a smaller percentage of completed stock, compared to Melbourne and Brisbane.

The analysis formed part of a deep dive on the Australian property market by Citi's research team.

Modelling by the bank forecasts house prices to fall by 10-15% nationally in the current cycle, with slightly steeper falls in Sydney and Melbourne.

A core part of the model was based on fundamental changes to the supply/demand picture, with price falls partly reflective of "supply belatedly catching up to and exceeding underlying demand".

Data from CoreLogic in August showed the number of new units in Australia is still expected to increase by almost 10% over the next two years, with most of that concentrated in Sydney and Melbourne.

While noting the recent slowdown in building approvals, Citi said new approvals are likely to still run above underlying demand in the 2019 financial year.

"It may not be until FY20 that dwelling approvals in Sydney and Melbourne are at or are below underlying demand," the analysts said.

Last week, the RBA expressed concern about the economic consequences of a slowdown in property construction stemming from tighter mortgage lending standards.