Australia's building commencements, fuelled by investor apartment construction, look like heading from boom to bust, according to forecaster BIS Oxford Economics.

Key points: Residential construction set to slide 23 per cent

Residential construction set to slide 23 per cent Victoria, the ACT and NSW will have the biggest declines

Victoria, the ACT and NSW will have the biggest declines The decline in construction will leave a hole in economic growth

In a reality check for investors who bought at the top of the apartment boom, BIS is predicting the biggest correction since the global financial crisis hit in 2008, with housing starts set to fall by almost 23 per cent by 2020.

Associate director Adrian Hart told the ABC's AM program that the slump would be led by high-density dwelling construction, which is set to halve over the next two years.

"What we're seeing is that what goes up tends to come down. It is a bust in residential apartments in the high density segment. But you have to look at how far it's come up," Mr Hart said.

"It's a hard thing to shake but you just have to look at the data.

"You can see that house prices have stagnated and that price effect is really going to start influencing investor behaviour on top of all the polices which have been trying to keep the speculative element of the housing market under control."

BIS predicts the fall in dwelling commencements will outweigh marginal growth in non-residential activity and will push the total value of building starts down by 10 per cent.

Broader economic fallout

While non-residential building commencements are expected to remain at record highs, Mr Hart warns the residential bust could have fallout for the rest of the economy.

"The building sector is switching from being a driver of strong growth to a drag on the economy," Mr Hart said.

"Residential building activity is set for a sharp decline.

"Along with its multiplier effects on industries such as construction, manufacturing and retailing, the Australian economy needs other investment drivers to support job growth and employment.

"While price falls are expected to be modest, the high concentration of investor demand in attached dwellings will see this part of the market fare the worst of all over the next two years."

A key factor in the residential slowdown has been tougher regulation by the Australian Prudential Regulation Authority (APRA) to curb investor lending, while the Foreign Investment Review Board (FIRB) and tax office has been clamping down on overseas buyers.

According to BIS Oxford, states that saw the greatest increases in residential commencements will bear the brunt of the correction, with New South Wales falling 26 per cent over the next two years, Victoria (-29 per cent), Queensland (-15 per cent) and the ACT (-27 per cent).

One upside from the correction to residential commencements is that first home buyers, upsizers and downsizers will have a greater opportunity to break into the market.

"Land prices have spiked in Sydney and Melbourne in recent years, pricing many people out of the market for new houses, " Mr Hart said.

"This (the correction) will act as a disincentive for new house building and pull buyers towards the established dwelling market."