“We believe the risk of a residential property market correction in the next two years is rising, as expected higher interest rates look set to coincide with a large increase in housing supply over 2014-15,” Tricia Song, analyst at Barclays wrote in a report on Friday.

The bank forecasts prices will remain flat in 2013, before falling 5 percent in 2014 and another 5-15 percent in 2015.

Southeast Asia’s financial center is home to one of the most expensive real estate markets in the world. Prices have soared over 60 percent since mid-2009, spurred by low interest rates.

The outlook is based on expectations that short-term interest rates will begin their ascent in the second quarter of 2015, and rise 200 basis points over a period of six months. The pace of property price declines will be tied to the pace of interest rate rises, Song explained.

Singapore mortgage rates are typically pegged to the short-term three-month Singapore Interbank Offered Rate (SIBOR) rate, which tracks the direction of the U.S. federal funds rate.

Adding to higher mortgage rates, a bumper supply of private and public housing is due to complete starting in 2014.

Almost 95,000 private units are expected to come on stream over the next five years, alongside 25,000-27,000 public housing flats per annum, according to the Urban Redevelopment Authority.

“Total housing supply could average 40,000 units per annum and peak at 47,000 in 2015 – significantly above the historical average annual supply of 12,300 units,” Song said.

“Assuming occupier demand of 15,500 units of private housing per annum, we expect the private vacancy rate to rise from 5.6 percent currently to 9.9 percent in 2016,” she added, noting that historically when vacancy rates hit 8 percent, rents and prices start declining.

Home sales have begun softening as the government’s cooling measures start to bite, with the latest monthly data showing developers sold 742 units in August, compared with an average of 1,000-1,500 units in the recent years, according to Barclays.

This year, the bank expects primary home sales to total 15,500 units, 30 percent below last year’s 22,179 units.

The government has introduced nine rounds of market-cooling measures since 2009, most recently targeted at the public housing market, which house 80 percent of the country’s citizens. The measures announced in August included shortening the maximum loan tenure to 25 years from 30 years, and reducing the mortgage ratio limit against the borrower’s salary to 30 percent from 35 percent previously.

-By CNBC’s Ansuya Harjani; Follow her on Twitter @Ansuya_H