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Fears of apartment oversupply in major cities -

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SAM LALLY, BUYER'S ADVOCATE: So here we are in the Docklands. One of the central hubs oversupply in the Melbourne marketplace. We tell our clients to obviously stay away from this type of asset class, just due to the fact they're all the same.

EMILY STEWART, REPORTER: There are 20,000 new apartments being built this year in Melbourne. They're concentrated in the Docklands, Southbank and the CBD and many are sold off the plan.

SAM LALLY: They're still being built. We're finding that investors and owner occupiers alike are losing just due to the fact of the amount of supply that there is.

EMILY STEWART: A BIS Oxford Economic study found many built in the past five years have either dropped in value or seen no price growth. And even the very conservative Reserve Bank of Australia has weighed in, warning of a looming oversupply in Melbourne and Brisbane.

RICHARD WAKELIN, PROPERTY ADVISOR: We're seeing substantial drops in value, the contract prices do not reflect the values that are coming in from valuers. And in some cases we're seeing drops of $40,000 - $50,000 - $60,000, before these properties have even been settled.

EMILY STEWART: Some of the big developers are now using incentives to lure buyers, like free furniture, paying for legal costs and rental guarantees.

RICHARD WAKELIN: Well, developers are facing a perfect storm.

EMILY STEWART: Investors have driven demand in the property market. Many are from China. But tighter lending restrictions from banks here and in Asia, coupled with the introduction of stamp duty charges this month, are already having an impact.

MARTIN BRIDGMAN, DEVELOPER: We have noticed the investors have dropped off but also the first-home buyers have picked up. This project is 114 apartments over three pods. This project took 11 months to sell out which is pretty well the average for our development.

EMILY STEWART: Developer Martin Bridgman says while there's less interest from investors, there's still plenty of demand for their inner ring apartments. He says population growth of around 100,000 people in Melbourne each year is soaking up the vast supply.

MARTIN BRIDGMAN: We haven't noticed an oversupply. We don't build inner city apartments. We tend to build around the inner suburbs, places where people want to live really.

EMILY STEWART: But analysts say the boom in construction is slowing down, with building approvals peaking last year.

MARTIN BRIDGMAN: We are still purchasing properties and applying for approvals and we actually just got approval today for one of our properties in Abbotsford.

EMILY STEWART: Reals estate agent Robert Eggers from Dingle Partners specialises in selling CBD apartments. With many apartments selling via private sale, there are just auctions being held in Melbourne today.

ROBERT EGGERS, REAL ESTATE AGENT: Right. Get all this set up.

We've been very happy with the buyer response. We initially started with a range around $340,000 - $370,000. We have now increased it up to $360,000 - $390,000.

EMILY STEWART: With stamp duty scrapped for first-home buyers on properties up to $600,000, new buyers are entering the market. Jennifer Dorward has been looking to buy for two months.

JENNIFER DORWARD, BIDDER: I like it because it was built in the 1920s. I like the fact that the fit-out has been done quite neutral.

EMILY STEWART: So do you think there's an oversupply of apartments in the CBD?

JENNIFER DORWARD: The newer buildings, yes. I don't think the quality or the spaces in them are very liveable. They're very small and poky.

ROBERT EGGERS: A Melbourne winter's day but a wonderful winter's day in this magnificent city. $350,000, I'll take it. At $380,000. $385,000. It is wonderful buying at this price. Going, going, sold. The property is sold for $415,000. My congratulations, sir.

EMILY STEWART: While this apartment sold well, there are concerns the market is turning. In May, a ratings agency S and P downgraded all 23 second-tier financial institutions, saying the risk of a sharp correction in property prices has increased. And investment bank Citi warns the downturn in apartments will filter through to a 7 per cent softening in house prices next year.

RICHARD WAKELIN: I think we'll see significant price drops. And those price drops will be somewhere in the range of 10 to 20 per cent.