Housing investment will fall further from record levels into negative rates of growth next year, as the Sydney and Melbourne markets prepare for a downturn following the government crackdown on investors.

The sector has driven the economy and fuelled a jobs boom – particularly in NSW and Victoria – but will now come off its peak according to official forecasts revealed in Monday's mid-year budget update.

Treasury has pencilled in a 1.5 per cent drop next year after a similar fall this year in a forecast that leading economists have labelled optimistic.

The news will fuel speculation the Sydney and Melbourne markets are in for a long-term downturn and give locked out first home buyers hope that the housing market is finally in a sustained retreat from its stratospheric heights.