A collapse in the number of interest-only loans being written by big banks is said to be combining with a drop in Chinese buyers of Australian property to create a "crunch time" for the economy next year.
Pressure will be put on the Reserve Bank to abandon its path toward hiking interest rates and further cuts to inflation and growth targets could lie ahead, according to Credit Suisse.
Figures released by the Australian Prudential Regulation Authority this week showed the share of new interest-only loans written by major banks nosedived to 16.9 per cent in the third quarter from 30.5 per cent, following an ongoing clampdown on the lending practice, while banks' high loan-to-value ratio fell slightly to 6.8 per cent from 6.9 per cent.
"Taking the two measures together, it appears that mortgage lending standards are at their tightest since the early 2000s," Credit Suisse economists wrote to clients on Thursday.
"This is bad timing considering that foreign property buying is already waning."
The economists said credit tightening was "amplifying a global shock" and that the Reserve Bank would be faced with weakening national growth in 2018 - making its goal of raising interest rates even more difficult.
Furthermore, the RBA cannot afford to "let bygones be bygones" and will need to further downgrade its growth and inflation targets, the economists said, adding that annualised GDP growth may slow to just 1 per cent.
"The bank is trying to deliver a credibly hawkish narrative to lift confidence and hopefully prevent the need for more rate cuts," the Credit Suisse report reads.
"However, we remain of the view that the RBA cannot afford to simply let bygones be bygones, because the accumulation of growth undershoots (relative to its forecasts) is signalling a wider output gap, and eroding its inflation-targeting credibility."
How many foreign property buyers are there in Australia? And are they losing interest?
While Credit Suisse hangs much of its gloomy forecast on two factors - weakening foreign demand in Australian real estate, and tighter lending standards - ANZ research poses a challenge to one of those forces.
The foreign-owned segment of the Australian housing market "is not large enough for us to be particularly concerned about a foreign exodus", according to senior ANZ economist Daniel Gradwell, who notes concrete data to support the Credit Suisse claim that foreign, particularly Chinese, purchasing of Australian real estate is sliding are "hard to come by".
Foreign investors bought between 35,000 and 60,000 Australian homes in the 2015-16 financial year, Mr Gradwell wrote in a report on Thursday, which accounted for a relatively small 7 to 13 per cent of overall housing turnover.
A more significant 15 to 25 per cent of newly constructed dwellings in some states are accounted for by foreign buyers.
But overall current foreign ownership of Australian housing stock sits at between 2.5 and 4 per cent, according to 20 years of Foreign Investment Review Board data - ANZ said this is an imperfect estimate and does not include properties bought before 1995.
"The sizeable foreign-buyer share of newly constructed housing implies that foreign demand has been an important contributor to Australia's recent construction boom," Mr Gradwell said.
"But the relatively lower share of total market activity suggests that foreign buyers have not been the primary driver of the price growth in recent years."
The bank concludes that only a large shock, causing a high share of foreign owners to sell their Australian property, would be significant enough to drive sale prices lower.