Since reaching the final of last year's World Cup, the Wallabies have lost six of seven matches, including a 3-0 series whitewash by England on home soil in June and successive thrashings by New Zealand in the current Rugby Championship.
"I think it's probably the worst Australian team I have ever seen and that's a real worry for the game," 70-year-old Henry, who guided the All Blacks to the 2011 World Cup win, told New Zealand radio station Newstalk ZB.
"It's a concern ... (New Zealand) haven't played South Africa yet, but they got beaten by Australia and they are woeful."
Australia snapped their six-match losing streak with a 23-17 win over a rebuilding South Africa in Brisbane last weekend and play Argentina in Perth later on Saturday.
The Springboks, who have also lost two of their first three games in the Rugby Championship, play the undefeated All Blacks away later on Sunday.
The world champion All Blacks are riding a 14-match winning streak and can all but seal the Rugby Championship with two rounds to spare with a bonus-point victory in Christchurch.
Pundits have expressed concern that the widening gap between the All Blacks and their southern hemisphere rivals is bad for the game and Henry had the same opinion.
"You want Australia playing rugby and you want Australia playing well and you want South Africa to be doing the same thing," he said.
"But South Africa have probably lost half of their tests over the last three years."
(Reporting by Ian Ransom; Editing by Larry Fine)
