That's the problem with tearaway booms.

The more exaggerated the run-up, the greater the pain when the inevitable decline kicks in.

Australian housing prices have been unwinding at a serious clip now for close to a year and a half, led by the cities that kicked off the boom, Sydney and Melbourne.

Suddenly, what previously was brushed aside as a healthy correction, now has regulators and policy makers, including the Reserve Bank, concerned.

While the declines so far are yet to present a threat to the broader economy, they are unlikely to be contained. Even normally cool heads are predicting a continuation of the great Aussie housing market unwind for at least the rest of this year.

The problem now is that the fundamentals driving the slide cannot easily be altered. An interest rate cut may ease the pain but won't cure the affliction.

That's because the housing market is being undermined by two potent forces; much tighter credit conditions and a looming supply glut.

Credit crunch here to stay

Plenty of pundits have called on the banks to just open the cash spigots and let it rip, just like before. Or put another way, return to the days of irresponsible lending.

There's no denying would-be buyers no longer have access to easy cash. If they can get a loan, they can't raise the kind of cash they once could. These days, banks rigorously test potential borrowers' capacity to service a loan, as they should have done all along. That's not going to change, at least not any time soon.

Less cash to splash directly affects prices, and the tighter credit conditions are far and away the biggest weight on the market.

Even the removal of two key lending restrictions by the banking regulator late last year have failed to fire up demand from investors.

Clearly, regulators are getting nervous. On Friday, the Reserve Bank cast aside its longstanding "she'll be right" attitude with a laundry list of worries about the local economy; many of them sheeted back to the state of our real estate.

In particular, it's worried the price declines have tipped many borrowers into what's known as negative equity. That's when your mortgage is greater than the value of your home. And that becomes an issue if you lose your job and can't maintain the repayments. Banks end up taking losses and credit becomes even tighter.

Nationally, it's not really a problem. But if you break it down on a regional basis, Queensland is a concern and Western Australia, where property prices have been in decline for years, is quite a worry.

A bar graph showing loans in negative equity in different states and territories. ( Supplied: ABS/RBA )

The looming glut

One of the RBA's biggest concerns was the large number of new apartments about to hit the market, especially in Sydney.

The bank's Financial Stability Review is normally a reasonably dry affair. Not this time. With an entire section devoted entirely to the risks associated with the shift in supply to high-density apartments, it makes for sober reading.

"The large influx in supply has the potential to exacerbate housing price declines," it notes.

It may be simple economics and something that has occupied the minds of many observers for more than a year. But this is the first time the Reserve Bank has been so explicit about the potential impact a sustained housing market downturn may have on the economy.

This graph from investment bank UBS illustrates just how unit construction has taken off since the boom began and how many have yet to hit the market.

A graph showing the number of dwellings under construction in Australia over the past 60 years. ( Supplied: ABS/UBS )

"Lower apartment prices increase the likelihood of settlement failures, but these remain low to date," according to the RBA statement.

That's a reference to those who have bought off the plan when prices were higher and credit was easier to obtain. They could have difficulty completing their purchases which adds to price pressure.

In theory, lower prices should impact rents. That's a painful prospect for investors who borrowed big to fund their purchases. If they default, that pain is passed directly onto banks.

The price declines won't go on for ever. But should the decline continue for the remainder of this year, as is likely, it will place strains, not just on the banking system, but on government revenues.

The sharp and sustained drop in housing prices has already had an impact on supply. Developers, fearing a glut, have pulled right back. In the March quarter, new construction dropped more than 16 per cent.

Despite all the rhetoric, immigration continues at a record pace. According to figures last week from the Australian Bureau of Statistics, the population last year grew by 395,000, mostly driven by immigration with the bulk of new arrivals landing in NSW and Victoria.

Increased demand and moderating supply ultimately will put a floor under the market. At least, that's the theory.

The problem is just how the downturn in construction impacts the broader economy. For the moment, it appears infrastructure projects are absorbing workers from the residential construction downturn. But if large numbers of workers end up jobless and unable to maintain loan repayments, the housing bubble deflation could become a problem.

It's already affecting government revenues. This graph, again from UBS, shows the impact lower prices and fewer sales are having on NSW Government revenue.

A graph showing stamp duty in New South Wales since 2006. ( Supplied: NSW Government/UBS )

It's a similar story in most other states, although NSW is the most dependent on real estate stamp duties.

While NSW has relatively healthy state finances, the lower revenue will impact its ability to maintain infrastructure construction spending.

That means the Federal Government will need to provide more funding to the states to ensure our cities are liveable and ward off the impact of a spike in unemployment.

That promised Federal Budget surplus may be more elusive than it seems.