Morgan Stanley sees APRA crackdown risks in any vicious bottoming cycle

The APRA-FRBA regulator-driven slower investor lending, and separate curbs on offshore property investment options for wealthy visa holders, could slow house price growth and put pressure an already weak economy, Morgan Stanley analysts suggest. 

The measures could hit the fragile economy's only bright spot of housing construction and property-related confidence, Ewa Turek, Sze Chuah and Terry Yuan wrote in a recent research note.

"In the past month, new regulation has been put in place that will temper demand from two key marginal buyers of property," the analysts said.

"While the intended impact of these regulations is to curb investor lending, the risk is that they will be too successful. A deceleration in property prices could put pressure on an already weak economy; firstly, through a slowing in housing activity as fewer building approvals are converted to starts, and secondly, via a deterioration in consumer sentiment and spending."

Any slowdown could damage confidence, the Morgan Stanley analysts said.  

"House prices and consumer sentiment are strongly correlated (due to the large cohort of the Australian population that owns a property)," they said, as reported in the Australian Financial Review.

"Even a deceleration in house price growth [that is, house prices are not falling, but just are not rising as fast as before] can start weighing on sentiment.

"This can become a vicious cycle until property prices bottom – as property price growth slows, sentiment deteriorates, which in turn puts further pressure on property."