Higher property price falls could emerge in balance sheet recession: Morgan Stanley

Property price falls could potentially double previous estimates, down 20 percent rather than 10 percent, according to Morgan Stanley.

The revision comes after weakening sentiment and tighter credit.

Potentially facing declines at their largest since the early 1980s, the investment bank's analysis suggests peak-to-trough property declines are now expected to be about 15 to 20 percent, compared with previous estimates of 10-15 percent.

Evidence of worsening conditions will increase pressure on the Reserve Bank of Australia to cut this year, the analysis reported by Nine Entertainment concludes.

"We are now watching second-round impacts closely," Morgan Stanley's team of equity strategists concludes about the broadening economic impact of the property slowdown.

"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.

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 late last year.

Finance commitments have slowed sharply for investors, it noted.

A 15-20 percent decline in real terms - after allowing for inflation - would be the largest slump since the 1981 to1983 decline, when the median house price in Sydney was $79,000.

Falls in house prices in real terms during the global financial crisis were about 9 percent.