Experts have warned that when the 'largest housing bubble on record' bursts, the slowdown in construction and lending could cause a recession

House prices in Australia are set to plunge by 7.5 per cent, fuelling fears that the country could be heading for a recession as early as March next year.

Experts have warned that the nation's over-inflated housing market poses a bigger risk of recession than a Chinese economic crash.

They claimed that when the 'largest housing bubble on record' bursts, the resulting deceleration in construction and housing lending will hit the economy.

Research from investment bank Macquarie has suggested that house prices will start to fall in March 2016, only starting to recover in 2017.

In a briefing paper titled 'Australian Banks: What goes up, must come down', researchers stated that they expected a 7.5 per cent reduction from peak to trough.

Bank of America Merrill Lynch chief economist Alex Joiner raised concerns about the lack of forecasting and said recent property price surges have defied economic logic.

Speaking at a media briefing on Australia's economic outlook, he said: 'The impetus for property prices just isn't there,' according to the ABC.

He made his point referring to record low rental yields for investors, very high household debt, low income growth and already high prices in Sydney and Melbourne.

'We are not forecasting collapse or the bursting of any perceived bubble,' he said in a note, according to Sydney Morning Herald.

'That said, it is not difficult to envisage a more hard landing scenario in the property market.

'This would clearly have a greater negative macro-economic impact channelled through households and the residential construction cycle.'

He predicted a rise in interest rates by late 2016 or early 2017, which is likely to see a reduction in house prices.

And he said the country would 'do well' to get out of this record housing cycle in 'relatively good shape'.

Wes Campbell, the head of institutional business for JCP Investment Partners, said the housing sector appears to have 'peaked'.

House prices in Australia are set to plunge by 7.5 per cent, fuelling fears that the country could be heading for a recession as early as March next year

Analysts have pointed out that the supply of new homes has been greater than demand for 'several years' which has also contributed to the surge in prices

He claimed tighter lending standards, credit repricing and changes in policy could also result in reduction of house prices.

'Housing has certainly been the sector keeping Australia afloat post the mining boom; however the sector appears to have peaked as regulators apply restrictive measures,' he wrote.

Mr Campbell said the chance of a recession was 'elevated', especially as there has not been one for 25 years.

Fears for a recession in Australia have been growing over the past few months amid slow economic growth, a downturn in mining infrastructure spending and a fall in living standards.

Bank of America Merrill Lynch chief economist Alex Joiner (pictured) raised concerns about the lack of forecasting

The economy grew by just 0.2 per cent in the June quarter, around half the rate economists were expecting, according to the Federal Treasury.

Investment bank Goldman Sachs has warned that Australia has a one in three chance of a recession if business spending and wage growth remain sluggish.

Speaking in September, chief economist Tim Toohey said: '[The risk of recession] currently stands at the greatest probability since the global financial crisis.'

Experts have warned that Australia's reliance on the property boom could place the country in an even more vulnerable position.

Credit Suisse has claimed that property investment in Australia, particularly New South Wales, is now 'riskier than the equity market'.

'Home-buying conditions have deteriorated sharply,' wrote equity analysts Damien Boey and Hasan Tevfik.

Mr Joiner said the slowing population growth could also result in an 'oversupply' of housing as many are unable to afford to buy in larger cities.

Analysts have pointed out that the supply of new homes has been greater than demand for 'several years' which has also contributed to the surge in prices.

Chief investment strategist Malcolm Wood from the Bank of America Merrill Lynch said one of his most certain forecasts was that the Australian dollar would fall further.

'Either way there's got to be convergence in rates,' he said.