"There is evidence of a consumer pullback over Christmas but jobs impact will be key for any negative feedback loop to push Australia into a balance sheet recession," it concludes.

A balance sheet recession describes where high levels of debt and growing nervousness about the economic outlook cause consumers or companies to focus on saving and paying down debt rather than spending or investing, causing economic growth to slow or decline.

For example, construction activity is expected to continue falling, particularly apartments, with tighter credit resulting in projects being shelved.

The research says credit growth continues to slow with the share of interest-only and investor lending low, despite the Australian Prudential Regulation Authority removing restrictions.

Finance commitments have slowed sharply for investors, a sector that typically leads prices. Investor-only approvals are running well below 20 per cent of system, with investor and the high loan-to-value share also drifting lower.

Nervous lenders, particularly the big four banks, are keeping a lid on new lending while they await the findings of the banking royal commission, expected around the beginning of February.

The pipeline of new buildings, particularly apartments, remains large and should continue to run ahead of demand over coming months, putting pressure on prices.


Sydney vacancy rates continue to climb, rental inflation remains at less than 1 per cent and rental yields falls are increasing as dwelling prices fall.

Price falls accelerated in the fourth quarter of 2018, with national prices down about 7 per cent from their peak, with economic indicators suggesting no let up in the pressure for this year.

A 15-20 per cent decline in real terms – which means after allowing for inflation – would be the largest slump since the decline between 1981 and 1983, when Malcolm Fraser was prime minister and the median house price in Sydney was $79,000.

Falls in house prices in real terms during the global financial crisis were around 9 per cent.

But more people think it is the "right time to buy a house", which is being reflected in the increase in first-time buyers and the "relatively sanguine" attitude of owner occupiers. Arrears are rising but remain at low levels.

Household leverage also continues to rise, with savings rates falling to 2 per cent, which could increase pressure against lowering rates.