Housing Downturn: Housing Cycle and Credit Crunch

housing downturn: Key points:Morgan Stanley is forecasting a credit crunch 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 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, according to Australian Broadcasting Corporation. 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. Related Story: Apartment prices fell 20pc back in 2004, could history repeat Related Story: High-rise apartment boom may be risky to economy: Westpac Related Story: Foreign banks funding the apartment boom: UBSMap: Australia 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. On the bank 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. 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. 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. (news.financializer.com). As reported in the news.