Inner-city apartment prices could plunge thanks to a wave of negative events says credit ratings agency Standard & Poor’s (S&P).

The ratings agency has added its voice to a number of market commentators warning about the confluence of apartments coming up for settlement and the number of new apartments coming onto the market at the same time as some sectors of buyers are thinning out.

Investors have been discouraged to over-extend themselves, with banks lowering loan-to-valuation ratios (LVRs), raising interest rates and lowering limits on what will lend to investors. Equally, foreign investors have been discouraged from the market, with a number of banks raising the issue of fraud and money laundering, as well as incomplete and missing paperwork in applications.

While the big four banks Australia and New Zealand Banking Group (ASX: ANZ), Commonwealth Bank of Australia (ASX: CBA), National Australia Bank Ltd (ASX: NAB) and Westpac Banking Corp (ASX: WBC) have all set restrictions on lending to foreign buyers, AMP Limited (ASX: AMP) yesterday announced that it too would ban loans to foreign buyers.

That could see foreign buyers seeking out smaller non-bank lenders, or exiting the market altogether. Lenders have also tightened restrictions on lending for inner-city high rise apartments.

If many investors have already put a deposit on an inner city unit, developers could find themselves with a load of apartments on their hands that they can’t sell at a high enough price to recoup their costs. Overseas buyers also tend to be big buyers of off-the-plan apartments.

S&P says the risks appear to be particularly higher in Melbourne and Brisbane thanks to a glut of apartment construction over the past year or two. That echoes a warning from the Reserve Bank of Australia in April – when the central bank said the potential for banks to make ‘large losses’ from soured loans to property developers.

S&P’s latest report does show that there are still low levels of mortgage stress, despite rising troubled loans in a number of mining regions, particularly Western Australia and Queensland.

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.