It won’t be the “bloodbath” predicted by some, but house prices in Australia will begin to level out in 2016-17 in response to a number of factors according to a report from research firm BIS Shrapnel.

In their Residential Property Prospects, 2015 to 2018, BIS Shrapnel predict a correction in prices similar to that seen in 2011 and 2012 as worsening affordability, rising interest rates and increased supply all take their toll on the market.

While price growth has been seemingly unstoppable in Sydney and Melbourne in recent times, the report predicts median prices in Sydney will only be 2% higher than current levels in June 2018, while Melbourne medians will only be 4% higher.

BIS Shrapnel senior analyst and report author Angie Zigomanis said the issue of supply is likely to have the biggest impact, with a boom in the construction of apartment complexes coinciding with a decline in the rate of population growth.

“Most capital cities are building apartments at record rates, driven by investor demand, as these projects are progressively completed, strong tenant demand will be required to support rents and consequently values upon completion,” Zigomanis said.

“However, we are seeing population growth nationally begin to slow. Net overseas migration has fallen from a recent peak of 235,700 persons in 2012/13, to an estimated 184,000 persons in calendar 2014,” he said.

“With the majority of net overseas migration classified as ‘long term overseas visitors’, that is, temporary but not permanent arrivals, this reduction will impact most on the rental sector.”

Resource driven areas in Western Australia, Queensland and Northern Territory are likely to be hit hardest by the slowdown in population growth.

With the detached house market less reliant on tenant demand, Zigomanis believes it will be less affected by supply and demand issues, however all markets are likely to be hit in late 2016 as the Reserve Bank reacts to the economy

picking up.

“Interest rates are expected to enter a tightening phase towards the end of 2016,” Zigomanis said.

“After recent wage constraint, the Reserve Bank is expected to ‘fire a shot across the bow’ to curb wage expectations and alleviate potential inflationary pressures.”

While BIS Shrapnel predicts the cash rate will increase by only 50 basis points that is expected to severely dampen the Sydney and Melbourne markets and will further weaken other markets that have not been experience the growth seen in Sydney and Melbourne.

The report predicts Brisbane will the strongest growth in house prices over the next three years as low levels of construction help prices turn around.

The Queensland capital is expected to be the only capital city not to see a decrease in median prices over the next three years, with a 13% total rise in the median house price predicted over the three years to 2018, while the median unit price is forecast to rise by a total 6%.

Other strong performers identified by BIS Shrapnel are Wollongong, Newcastle, the Gold Coast, the Sunshine Coast and in Cairns, where prices are expected to climb by at least 10%.