Australia’s real estate market has been described as one that is “cooling, not crashing” in a new report released from Citi Australia.

According to the report released yesterday, the Australian housing market can expect capital growth to slow from its current level of around 10% per annum to 4% over the 2016/17 financial year and then to 3% over 2017/2018.

It’s predicted that the cooling off in price growth will be driven along an increase in housing supply coming online at the same time demand for housing falters.

“Unlike previous cycles, the current boom has resulted in a much larger number of apartments under construction than houses, particularly in inner city suburbs of Sydney, Melbourne and Brisbane,” the report said.

“If all potential pipeline construction for apartments comes into market, it will pose a significant downside risk to price growth for the next two years.”

According to the report, a decline in the rate of population growth will be one reason for the fall in demand.

“Annual population growth rate averaged 1.7 percent since 2006, but has recently slowed to 1.4 percent,” the report said.

“While natural increases in population have been declining steadily since the 1970s, net immigration has been fluctuating a lot more. The mining boom in recent years brought a record number of immigrants. The end of the boom, however, has meant an easing in the level of net immigration.”

The mining boom slowdown means that whatever population growth there is isn’t spread evenly across the country, with growth slowing in resource heavy states such as Queensland and Western Australia, while remaining relatively robust in states such as NSW and Victoria.

Also exacerbating the effect of the supply surge is the fact that investor demand has slowed recently, as changes to the lending market take hold.

“Underlying the reduced investor appetite has been the recent application of macroprudential policies.

“In response, some lenders are curbing investor lending or increasing interest rates on investment lending by around 30bps, while loans to owner occupiers have risen by 15-20bp.”

Demand will also decrease as there is a slowing in the amount of foreign money directed to Australian real estate.

“We argue the capital outflow restrictions by countries such as China are likely to see a decline in foreign purchases in the Australian market.

“Since August the Chinese government started to implement tougher capital outflow restrictions in a concerted effort to prop up the RMB and its foreign-exchange reserves, as well propagating its now highly effective anti-corruption campaign.”

Chinese nationals are now only allowed to spend $50,000 out of the country a year and the government has also taken a harder stance against illegal banking methods.

“The Chinese Ministry of Public Security came out in August saying it was cracking down on underground banks. The clampdown is probably already having a visible effect on the cooling property markets in Australia.”