'Correction' in apartment market may lead to Australia-wide recession

Tightening of lending standards by Australian banks is likely to cause a "correction" and "crisis" in lower-priced apartments that will spread, resulting in smaller developer defaults, a sharp contraction in construction, with a "worst case" scenario of significant falls in home prices and a nationwide recession, according to a new report by analysts CLSA. The authors recommend a "sell" on stocks of companies most likely to be affected, including CBA, listed property giant Lendlease and Mirvac. Meanwhile, UBS warns in a new report that the rapid increase in housing supply is a significant risk for offshore banks which are funding the record number of new developments.

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.

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.