A slowdown in the housing industry and a glut in high rise apartments is putting 200,000 jobs at risk and could drive unemployment up to 6.5 per cent, according to detailed research from US investment bank Morgan Stanley.

Key points: Morgan Stanley is forecasting a credit crunch

Morgan Stanley is forecasting a credit crunch Mounting evidence the housing cycle is already starting to roll over already

Mounting evidence the housing cycle is already starting to roll over already Significant chance the contagion of a housing downturn may spread directly to household balance sheets

The Morgan Stanley strategy team said there were "mixed signals" in the housing cycle, which were causing complacency about the impact of a potential slowdown.

"Construction is booming, but we see a sharp slowdown ahead for future apartment developments," said the report's principal author, Daniel Blake.

"Transaction volumes and price growth have slowed, but auction clearance rates have remained high — reflecting lower volumes and their bias to top-quartile [more expensive] Sydney and Melbourne property.

"Rental conditions have deteriorated and we expect them to weaken further on the basis of a sustained overbuild."

Apartment glut to hit 100,000

Morgan Stanley is forecasting a credit crunch resulting in a hard landing for the new apartment construction cycle.

The apartment sector is facing a perfect storm of tighter credit conditions, — being driven by banking regulators locally and offshore — reduced appetite from investors, cost escalations affecting returns and weakening industry sentiment, which Morgan Stanley argued could lead to a "sudden stop" of new projects.

On the bank's figures this would result in an "overbuild" of 100,000 apartments and rental vacancy rates reaching historical highs of up to 4.5 per cent.

Worryingly for the banks, the research found under this scenario up to $120 billion worth of settlements due by the end of 2018 would be at risk.

"The negative feedback loop from broadening developer distress is the fast track to our bear case," Mr Blake noted.

That bear case would see valuations falling by more than 10 per cent, leaving investors with an incentive to walk away from contracted purchases, developers going under and banks being hit with deteriorating credit quality and rising delinquencies.

"[The] resulting developer insolvency, and a shock to employment from a sharp correction in activity [would lead to] an associated hit to wealth, confidence and spending," Mr Blake warned.

Jobs to go as cycle rolls over

There is mounting evidence that the housing cycle is already starting to roll over already.

Preliminary data points to transaction volumes running down about 10 per cent in the year to June, while new property listings are down 16 per cent in Sydney over the year and 4 per cent in Melbourne.

"This 'transaction cycle' is likely to be an incremental drag on the labour market," Mr Blake said.

"For instance, we would note that Australia employs 89,000 real estate agents — 0.7 per cent of the labour force — and to this we need to add mortgage broking, advertising and conveyancing jobs."

While conceding precise estimates were difficult, the Morgan Stanley research suggested a 10 per cent decline in transactions and a forecast 33 per cent fall in construction — from 225,000 homes and apartments to 150,000 over the year — would put around 200,000 jobs at risk.

In other words, around 1.6 per cent of the current workforce.

Household savings hit

Slowing turnover will also affect the fiscal position of state governments via lower stamp duty revenues — indirectly affecting budget positions.

Worryingly there is a significant chance that the contagion of a housing downturn may spread directly to household balance sheets via foregone deposits, weaker investment returns and lower capital gain expectations.

"Historically, the detached [non-apartment] market has been partially insulated from apartment price/supply cycles but we expect some fallout, with Australian investors having around 3 to 4 per cent of household net financial worth to be invested in new apartments through to end-2018," Mr Blake said.

"On this basis, any weakness would leave affected consumers more cautious and probably looking to rebuild their savings."

In the overall economic picture, Morgan Stanley found that with a transition away from a housing boom colliding with the continued unwinding of investment in resources, economic growth (GDP) is likely to slip back under 2 per cent next year.

However, there is a silver lining for renters and potential home upgraders likely to benefit from the softer housing conditions and cheaper prices.