Australia's economy is the most vulnerable to household debt reduction among the world's 10 leading developed economies according to Morgan Stanley's Household Deleveraging Risk Indicator report.
The country has the greatest risk due to weak house prices and tax changes that could impact future property investments, according to the bank's report first reported by Bloomberg.
The bank strategists have predicted a potentially longer recession particularly if regulators resort to implementing tougher macroprudential measures that could control lending and delay credit growth.
Nevertheless, Morgan Stanley said Australia would probably just undergo a "benign deleveraging phase" since the country has a strong global economy and efficient public infrastructure spending.
Australia's high household debt and soaring house prices have also been the focus of repeated warnings coming from the International Monetary Fund.
In her comment about the potential effect of Labor's plan to restrain capital gains tax breaks, Reserve Bank of Australia assistant governor Michelle Bullock said investors have already been feeling the pressures of a slow lending growth as the country's regulators toughen policies on loans.
Australia's central bank has warned about Australia's high household debt and soaring house prices several times in the most recent years. RBA, however, has downplayed its own warning since each reminder was made with a prediction that economic impact of mortgage debt would only be debilitating if coupled with rising unemployment among Australians. In September, the central bank said 40 percent of individuals in high-income households accounted for two-thirds of household debt.
The warning from Morgan Stanley coincided with a report released by the Australian Taxation Office which found that the country's collectibles have increased to almost $24 billion in 2017 and now has reached $23.7 billion up from $20.9 billion in 2016. Small businesses accounted for the big chunk of these collectibles.
ATO revealed that nearly $10 billion of the country's $24 billion debt is subject to objection or appeal, $1.1 billion proved to be "uneconomical to pursue" while $3.7 billion is considered "irrevocable at law."
ATO's Tax Avoidance Task Force, meanwhile, raised $2.8 billion in liabilities with over $1.3 billion coming from multinationals and over $1.1 billion coming from wealthy individuals.
Elsewhere, Morgan Stanley estimates that household debt in the world's 10 largest developed economies soared to 160 percent of income from 98 percent over the past 20 years.
Sweden, Canada, and Norway are next to Australia in Morgan Stanley's list of most at risk market from household debt reduction.
Meanwhile, household debts in the United States, Japan, the European Union, and the United Kingdom have relaxed since the global financial crisis.
