How much further will Australia's property prices fall?

How far will property prices fall in the long-awaited correction? Economists such as UBS's George Tharenou believe they will dive deeper than his original estimates.

After the longest boom so far, Tharenou, who called the top of market last year, says housing is already weakening more quickly than UBS's bearish view.

For a start, home loans have dropped by 10% since August 2017, before the full impact of the financial royal commission.

"We have shifted our base case towards our 'credit tightening scenario', where home loans fall 20%, credit growth drops to flat, prices fall persistently and the Reserve Bank holds [interest rates] for longer," says Tharenou.

"This, coupled with record housing supply in coming years and a slump in foreign buyers, sees us downgrade our house price outlook to fall 5%-plus over the next year, below our prior 0 to -3% year on year."

Tharenou says macro prudential policy tightening, plus the royal commission, could see lenders reduce borrowing capacity by 30% to 40%.

This is likely to be more negative for prices of existing homes than for new home demand, which is supported by strong population growth.

Falling home prices are likely to result in a fading "household wealth effect" with consumption moderating as households become less willing to fund spending by running down savings, which are already at a post-GFC low of about 2.5% of income, says Tharenou.

This will keep the consumer price index (CPI) fairly contained, with the RBA unlikely to increase interest rates until at least the second half of 2019, predicts Tharenou.

He says the bank almost never raises rates when house prices are falling, and we are arguably already in "rate-cut territory".

"But the RBA's optimistic outlook means they'll likely keep signalling the next move is up.

The hurdle to actually ease is still high and they would likely need to feel compelled by sharper price falls or 'real' economic weakness, like rising unemployment or softer consumption, implying weaker than expected CPI."

But housing should not crash, says Tharenou - not without unexpected rate hikes or higher unemployment.

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