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.