Morgan Stanley analysts, led by Daniel Blake, focused their attention on the looming apartment glut in inner-city regions.

In a recent research note, the analysts said the apartment glut is set to trigger a sharp slowdown in future property development, which in turn would negatively impact economic growth. This would put 200,000 jobs at risk and prompt the Reserve Bank of Australia (RBA) to slash rates to one percent next year.

The oversupply will largely be tied to Brisbane, Perth, and Melbourne, though Sydney is also at risk given the surge in construction.

The analysts said there would be a swift halt to apartment construction amid expectations of a glut of around 100,000 properties within two years. “Concerns and tail risks for the apartment market are building,” the analysts wrote in the report. They also warned that the industry is facing a more imminent credit crunch for settlement and development.

The analysts predict that multi-dwelling approvals will slow by about 46% to an annual pace of 67,000 by the fourth quarter of 2017, and decline further to 57,000 by the end of 2018.

“Our forecast of a ‘sudden stop’ of future apartment activity, driven by APRA-induced rationing of credit availability should help to manage this future oversupply.”

The analysts further noted that the harsher lending standards imposed by APRA were making their mark, but more work was needed to embed a less risky culture in the banking sector and reduce the threat of a crisis.

“Over the past year, we believe the industry has appreciably improved its lending standards,” said Wayne Byers, chairman of APRA, at a recent appearance before the Senate Economics Legislation Committee. “But risks within the housing and residential development markets remain elevated. We are therefore giving thought to how best to have improved standards firmly embedded into industry practice, such that they are not eroded away again over time.”

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