A "correction" in the apartment market could see sharp falls in all Australian home prices and a nationwide recession, a gloomy bank analyst report on the housing market warns.
The report by analysts CLSA paints a "base case" scenario which says Australia's housing cycle has "peaked," with household debt now extending the country's property bubble.
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House price growth 'to halve'
An oversupply of apartments and the taxation of foreign buyers will restrict growth in house prices in Sydney and Melbourne, says HSBC economist.
The shift by big banks to tighten lending standards is likely to cause a "correction" and "crisis" in cheap apartments which will spread, leading to defaults among smaller developers and a sharp contraction in construction, CLSA says.
The "worst case" scenario foresees "dwelling prices falling sharply in all areas, eventually leading to a recession," the report's authors, a respected former banking analyst Brian Johnson, and his colleagues Andrew Johnston, David Murphy, Sholto Maconochie, Chris Kightley and Ed Henning say.
"Issues of affordability and household debt are overextending Australia's real estate bubble, which is being held aloft by foreign capital," they say.
"Our base case has the crisis starting with cheap apartments and later spreading to other flats in close proximity."
The authors put a "sell" recommendation on stocks of companies most likely to be affected by the crunch, including the country's biggest bank CBA and listed property giant Lendlease. Another property player Mirvac would also be impacted, they said.
Mr Johnson and co. said they believe a correction in the housing market will start with settlement problems among apartment buyers, where purchasers who stumped up a 10 per cent deposit simply walk away leaving developers to recoup the money or resell the unit.
Under the "base case" scenario the contagion from falling apartment prices has a "muted" impact on single-family homes and is not enough to push the economy into recession.
The risk of the "worst case" happening, which predicts sharp price falls and a recession, is increased because Australian household's are holding debt that is at 122 per cent of GDP and house prices are 12 times price to income ratios, the authors say.
Another report released Friday by banking giant UBS also highlights the impact foreign money is having on the housing market.
While lending by Australia's big banks for apartments has ground to a halt, many developments are nonetheless going ahead with funding from offshore banks, UBS notes.
It says over the last twelve months residential approvals have hit a record 235,000, with 73,000 of those for apartment buildings four-or-more storeys high.
There are now 525 residential construction cranes towering over Sydney, Melbourne and Brisbane, mainly for high-rise apartments, the bank said.
"We see the rapid increase in housing supply as a significant risk for the banks," UBS stated.
Australia's house prices rose 7 per cent over the year to August, according to CoreLogic data. They were bolstered by strong growth of 9.1 and 9.4 per cent respectively in Melbourne and Sydney.
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