AMP now thinks the Sydney and Melbourne housing markets can fall up to 20%

• AMP chief economist now expects Sydney and Melbourne house prices to fall by 20% from peak to trough, through to 2020.

• It marks an increase from the 15% decline AMP forecast at the start of August.

• The previous prediction was based on annual price falls of 5%, but Oliver said auction clearance rates now suggest falls of 7-8% are likely.

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AMP chief economist Shane Oliver has downgraded his price forecasts for the Sydney and Melbourne housing markets.

At the start of August, Oliver said he expected price falls in Sydney and Melbourne to max out at 15% from peak to trough.

He now expects price falls in those markets will reach 20% as "credit conditions tighten, supply rises and a negative feedback loop from falling prices" develops.

He also cited the ongoing decline in auction clearance rates across Australia's capital cities, which fell to just 50.7% last week.

Oliver's 15% prediction was based on annual price falls of around 5% to 2020.

However, "clearances in recent weeks have been running around levels roughly consistent with a 7-8% price decline," he said.

"As such we are now allowing for a 20% decline in prices in these cities, again spread out to 2020, which would take average prices back to first half 2015 levels."

Possible changes to negative gearing and capital gains tax if the Labor government wins office could also "have the potential to become a major drag on prices".

Annual price falls in Sydney have so far reached 6.3%, while Melbourne has declined by 4%.

AMP's revised outlook follows a downgrade by Morgan Stanley last week, which forecast Sydney and Melbourne house prices will now fall by 10-15% (down from 5-10%).

Oliver added that prices in Perth and Darwin are now "at or close to the bottom", while Adelaide, Brisbane, Canberra and Hobart are likely to perform better through 2020.

So what does it mean for the broader economy?

Oliver said the prospect of a housing crash -- 20% or more across the national market -- are still low. Population growth will help support prices and levels of mortgage stress "tend to be overstated".

The negative effects of a 20% fall in Sydney and Melbourne will play out via a slowdown in dwelling construction, reduced credit growth and consumption headwinds caused by a negative wealth effect.

That will be offset by strong growth in infrastructure spending and business investment. The net effect will result in annual economic growth of 2-3%, with low inflation.

As a result, Oliver maintains his view that the RBA won't be raising rates until 2020 at the earliest, and "given the downside risks related to house prices, it may have to cut rates".