The report found the pipeline of building work has expanded in recent years, and the backlog is now shrinking.

“The downturn in the level of home building activity will be contained to the next two years, as long as migration policy is not tightened further,” said Tim Reardon, HIA Chief Economist. 

Mr Reardon says market confidence fell away as property prices corrected, which had an impact on all segments of the market. 

"Investors and owner occupiers are delaying purchase decisions and foreign investment has also fallen dramatically for numerous reasons. 

“An additional and unanticipated factor that emerged in 2018 was the credit squeeze created as banks reduced the amount of money they are prepared to lend each customer. The impact of the credit squeeze will moderate over the first half of 2019, as the market adjusts to these new limits," Mr Reardon said.

He said that unless the leading indicators don't improve in the first half of 2019, the pipeline of building work will be exhausted at a concerning rate. 

“Builders in markets with a significant volume of work in the pipeline – such as Melbourne – have not been affected by the downturn yet, but other markets that were already performing poorly – such as Perth – have seen their market fall to a new historic low point. 

“As yet, the impact of the credit squeeze does not warrant a material downgrade to our forecasts as the strength of the economy supports building activity as it recalibrates to more traditional levels.

"The building industry, which has driven activity in the rest of the economy for the past five years, is now reliant on the strength of the rest of the economy to deliver an orderly downturn. 

“The expectation that governments will not constrain net overseas migration is central to this outlook for a contained downturn. 

“If the fall in overseas migration accelerates then interest rate cuts are likely to be necessary in order to mitigate the adverse impacts of this home building downturn on the wider economy,” Mr Reardon added.

It follows after figures from the Australian Bureau of Statistics (ABS) showed the value of construction work completed on new homes declined by 3.7 per cent in the final quarter of 2018.

“This implies that the pipeline of new residential building work is thinning out and as the homes that are currently under construction reach completion there are likely to be fewer new projects to replace them," HIA Senior Economist Geordan Murray said of the results.

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