A boy sledging from a hill in Prague. Michal Cizek/AFP/Getty Images

Australia’s housing market has peaked and a correction is on the way, according to analysis by CLSA.

The broker and investment house says issues of affordability and household debt are overextending Australia’s real estate bubble which is being held aloft by foreign capital.

“We believe the housing cycle has peaked and that new construction will decline over the next two years,” the analysts said in a study, Snuffing Puff.

“Our forecast is based on a scenario where over the next few years, we will see a number of apartment buildings struggle to achieve reasonable levels of settlement, leading some small, private developers into receivership.

“This will expand into surrounding apartment buildings. While we believe that there will be limited settlement risk on high quality flats, it will result in a sharp slowdown in new apartment developments.”

CLSA said tightening bank credit standards were the likely catalyst for a correction.

“Our base case has the crisis starting with cheap apartments and later spreading to other flats in close proximity,” the analysts wrote.

“This is likely to lead to defaults among small developers and a sharp contraction in apartment construction. However, it is unlikely to result in sharp price declines in other regions.

“Our worst-case scenario would result in dwelling prices falling sharply in all areas, eventually leading to a recession.”

CLSA said Australia’s foreign investment principles encouraged overseas capital to increase the stock of domestic housing.

“But the resultant purchases of unoccupied apartments fall out of line with this principle,” the analysts wrote. “As such, we expect more action to discourage such activity.”

Banks have been tightening their lending policies for developers and housing investors, particularly foreigners, for nearly a year.

“Regulations, enforcement and fees have increased and the free flow of capital from China has been curtailed,” the analysts said.

NSW, Victoria and Queensland have introduced foreign investor stamp duty surcharges for transactions for residential real estate.

More than 40% of foreign investment in Australian property comes from China, as this chart shows:

“In February, we cut our apartment forecast due to concerns around ongoing bank tightening and capital flows out of China,” the analysts wrote.

“The squeeze on lenders continues, albeit recent actions – both publicised and anecdotal – indicate it is highly targeted towards foreign investors and apartment-focused lending.

“Regulation aimed at foreign buyers (and we expect more to come) will also create an impact.”

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