18 reasons why property prices will fall further

"Nevertheless, with debt repayments rising anywhere between 20 [per cent] to 50 per cent upon conversion, many recent borrowers will be placed under considerable financial stress."

Credit crunch

The next five factors relate to the growing credit crunch and changes in the way banks operate following the banking royal commission including heightened expense verification on loan applications and the introduction of the minimum interest rate floor buffer of 7 per cent by APRA.

"Research indicates banks now originate mortgages at an average rate of 7.3 per cent. It will have the same effect as enforcing reliance upon proper estimates of borrower expenses, thereby reducing maximum loan sizes," the report said.

Comprehensive credit reporting will be fully active by July, allowing lenders to see borrowers' full credit history while bank profits will come under pressure when the phased establishment of the new open banking policy completes in July, LF said.

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Five-stage bubble burst

Along with falling rental income particularly in Sydney, the rising rate of mortgage rejections, construction defects such as the Opal Tower and the impending changes to negative gearing, the increasingly vulnerable market is now moving into the "third stage" of a five-stage bubble-bursting process, LF said.

The first two stages surround price falls and cancelled projects while the third stage refers to a deflation of property prices falling past "thresholds that owners are comfortable with".

"With many pressures mounting throughout 2019, we are confident that house price declines will accelerate in Sydney and Melbourne. In our baseline scenario, we anticipate nominal house prices to fall between 15 to 20 per cent in 2019 alone in both cities," LF said.

"If the finance and housing markets deteriorate more than expected, it is possible house prices could fall by up to 25 per cent in nominal terms."

Declines to accelerate

The group's research suggests prices will not only continue to decline to at least June, but the rate of price decline will accelerate.

The premise of this research lies in the retreat of mortgage debt growth which has largely fuelled the recent boom.

LF's call is one of the most extreme in the market although other economists have similar bearish outlooks on the market.

AMP Capital chief economist Shane Oliver forecast a further 15 per cent price fall in Sydney and Melbourne for the year.

National Australia Bank economist David de Garis is sceptical on whether a recent bounce in auction clearance rates will hold out.

Bears overblown falls

SQM Research is however standing by its base-case November forecast of a 6 per cent to 9 per cent fall in prices in Sydney and Melbourne for the full year, saying extreme housing bears have overblown their forecasts.

"To have these type of declines [up to 25 per cent in 2019], you need to have some panic ... there are still buyers in Sydney and Melbourne," SQM's Louis Christopher said.

"The thing in this point in the cycle that bears hate to discuss is that defaults and arrears are still very benign. There is not much forced selling activity at this point. You will need a lot of forced selling but we are just not seeing it."

"We are seeing a lot of flighty property investors who want to get out before the market falls further but they not getting out at any price."

"You will also have to have lower auction results right now to have that kind of decline ... and asking prices are not falling at that annualised rate [either]."

Mr Christopher warns however if negative gearing is repealed, the consequences may be very dire for the housing market because it will trigger a recession which will circle back into more price falls.