Australia has witnessed a five-year long, record-breaking housing boom, especially in the south-east.

Key points: Residential construction work done down 4.4 per cent

Residential construction work done down 4.4 per cent UBS predicts new home construction will fall from 230,000+ to 170,000 dwellings per annum

UBS predicts new home construction will fall from 230,000+ to 170,000 dwellings per annum Deloitte Access Economics warns that housing boom economies of NSW and Victoria will be hardest hit by downturn

Not only have Sydney and Melbourne property prices surged far above previous records, but an explosion of high rise developments has fundamentally altered the skyline of many inner-city areas.

But now there is growing evidence that this boom is coming to an end.

Last week saw key data on construction activity released that seemed to confirm the peak of the building boom has passed.

ABS data showed a 2.4 per cent fall in the value of construction work done, led by a 4.4 per cent slide in new residential building and a 5.1 per cent slump in renovations and additions.

This reinforces the downward trend in building approvals, which are off almost 20 per cent over the past year.

The Australian economics team at UBS already called the top of the property boom a few months ago, and these latest figures have reinforced that view.

After peaking at around 230,000 last year, UBS sees the number of new homes being built dropping to about 170,000 at the end of next year.

It is a big fall, but no worse than previous construction boom busts, which typically see a 30-40 per cent decline from peak to trough.

UBS is also forecasting slower price growth, to the point where home prices may remain flat next year, well down from current double-digit annual growth in Sydney and Melbourne.

The global investment bank's chief economist in Australia, George Tharenou, said this is his "base case", but there are risks.

"I would describe the outlook still as a muddle through story for the Australian economy and the housing market ... assuming that interest rates stay around their current record low levels," he told RN Breakfast.

"But if you did have a combination of the RBA starting to raise interest rates on an outlook which is getting better, based on better jobs [numbers] and it intersects with a timing that foreign demand [for housing] is now starting to fall and banks continue to reprice mortgage rates you are running the risk of having a harder landing for the housing market."

'Gravity starts to catch up with stupidity'

Respected Deloitte Access Economics analyst Chris Richardson was less diplomatic in his assessment of Australia's real estate risks.

"Housing prices: Gravity starts to catch up with stupidity", he titled his latest report.

"Don't forget that today's heroes – NSW and Victoria – have clay feet.

"A house price boom borrows growth from the future, and both NSW and Victoria will have to pay back some of that in the years ahead as today's housing prices gradually reconnect with reality."

Neither UBS nor Deloitte Access are forecasting a house price crash, however both see the risks of such an outcome increasing.

Ironically, it is continued strong home price growth that itself might precipitate a subsequent sharp price fall.

"If the RBA sees a housing which is weaker than they expect, with activity falling next year and also price growth slowing down they will feel more comfortable to be able to keep rates at their current low levels for longer," Mr Tharenou said.

"But the issue they face has been the ongoing persistence of price growth - really, it's too strong and it's unsustainable.

"So what the RBA are looking for will be a soft landing in prices over the next 12 months or so, to allow them to keep rates on hold, but if prices keep running at these types of levels they probably will feel compelled to start thinking about starting to raise them."

Knock-on impact from housing decline

If home prices did start falling, it would have serious economic fallout, such as the cancellation of some developments causing construction job losses.

Worse than that, warned Mr Tharenou, is the negative effect on consumption if the value of people's homes drops.

"There is still a fair pipeline of work yet to be done that'll keep people employed over the next year or so," he said.

"But what could happen if house prices start to fall is that people become a bit more cautious around their attitudes towards spending and that's really been a key support for consumption.

"And, in Australia's services-based economy, if you start to see people spend less there will be a rise in unemployment as well."

If people did start losing their jobs, they would be unable to meet their mortgage repayments, thus defaulting, causing losses for the banks, and with forced property sales driving prices even lower with the danger of a downward spiral.