The risk of a sharp correction in the housing market is rising, with an explosion in supply likely to coincide with a fall in demand, BNZ economists warn.

In a research note, the bank's economists note that weaker population growth, coupled with a drop in investor demand and home-ownership now viewed as out of reach by many, will see demand come under pressure.

Meanwhile, the supply of new houses was soaring, with 42,848 consents issued for new dwellings in the year to April.

"On a per-capita basis, this is now surpassing the 2004 building boom. And, yet, there is no sign of this coming to an end anytime soon," says the economists' research note.

"Accordingly, we think we are entering a multi-year period when the marginal supply exceeds the marginal demand which, in turn, should put downward pressure on house prices."

The BNZ economists say they were not predicting a price slump, but would not rule one out either.

"Even if prices fell 20 per cent, it would only take them back to where they were a year ago.

"For new buyers, this would be problematic but for prospective new entrants a boon. For the majority, it shouldn't really matter."

The economists also suggest weaker price growth, weaker growth in demand, and the supply boom would lead to a softening in residential construction over the next two years.

- RNZ