ANZ in Australia has revised its forecast downwards for the Australian housing market, and now believes house prices in Sydney and Melbourne could fall by 15% to 20% from their 2017 peaks.
The bank had previously been expecting price falls to be limited to 10% to 15%.
In a Double Shot interview with interest.co.nz, ANZ's Head of Australian Economics David Plank said recent price falls in Melbourne and Sydney had been greater than the bank had been expecting.
"It became clear a month or so ago that our forecasts weren't bearish enough, mainly in Sydney and Melbourne," he said.
"So we revised it down to 15% to 20% which, if we are right, will be the biggest fall ever in nominal house prices."
Plank said the downturn was mainly the result of credit tightening in Australia.
That was partially due to banks themselves being more cautious and partly due to stricter lending criteria which regulators had put in place.
But there is a concern that a slump in house prices could cause a wider economic downturn.
Plank said that was not the case at the moment.
"Businesses are telling us that things are pretty good and so we are seeing employment growth remain strong," he said.
"We've seen business intentions in terms of investment, rising.
"So at the moment it seems that this correction in housing is happening, ... and if you look at everything else other than housing, it looks pretty good.
"The issue then becomes, can we have a sizeable correction in house prices, and this will be the biggest we've ever had, without it having a flow back effect on the rest of the economy.
"And that's essentially the million dollar question people are trying to form a view on."
Plank said that as prices fall, affordability improved and at some stage buyers would start to become more active in the market again but they were likely to remain cautious until late next year.
"By late next year we should start to see the market stabilise [but] I wouldn't expect a surge in pricing," he said.
Here is ANZ's full report on the Australian housing market.
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