As the Australian residential market braces for a 7.5 percent plunge in house prices by March next year, investment banks are warning of a potential recession in the Australian economy.

According to a report by Macquarie Research, the slowdown in housing lending and construction runs greater chances of heading toward a recession than the slowdown in China. The report, titled "Australian Banks: What goes up, must come down,” states, "Our economics team are forecasting quarter-on-quarter house prices to fall from the March 2016 quarter before beginning to recover from June 2017.”

Alex Joiner, an economist from the Bank of America Merrill Lynch, believes that alarming household debt rates, which have been going up, as well as plummeting house prices could intensify the chances of recession if the Reserve Bank of Australia decides to increase its interest rates in a bid to avoid inflation.

"This would clearly have a greater negative macroeconomic impact channelled through households and the residential construction cycle," he said.

Joiner also believes that the effects of China’s slowdown are comparatively lower for the Australian economy than high-priced property in Melbourne and Sydney. “We are not forecasting collapse or the bursting of any perceived bubble,” he said in a note, according to Sydney Morning Herald.

He was also concerned by the housing glut as skyrocketing property prices make homeownership less accessible to many. However, Joiner ruled out the possibility of an interest hike before the end of 2016 or early 2017.

"We'll do well to get out of this record housing cycle in relatively good shape," he told the ABC.

With regards to the Australian Prudential Regulation Authority, "macro-prudential policy tightening, tighter lending standards, interest-only loans being discouraged by regulators and the repricing of credit are all expected to negatively impact house prices and the demand for credit," said Wes Campbell, head of institutional business at JCP Investment Partners, in the report.

Campbell also rated the chances of recession after nearly 25 years. "The combination of weak disposable income and high household debt is concerning, particularly given Australia may have to raise interest rates in the future to follow the United States," Campbell warned.

It was also mentioned in the report that slow population growth could also hinder the housing supply, which would eventually drive property prices down and result in negative equity.

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