Australia’s economy is most at risk in the developed world from household debt reduction because of weak house prices and potential tax changes that could curb property investments, according to Morgan Stanley.

That’s the conclusion from the bank’s Household Deleveraging Risk Indicator, which looks at relative debt and structural weaknesses.

The study of the world’s 10 leading developed economies puts Sweden and Canada as the second-most at risk, followed by Norway.

“These economies now face a crucial juncture as housing markets weaken, forcing a reappraisal of leverage and wealth, and global financial conditions tighten, increasing the consumption drag from debt service and rising savings,” the bank’s strategists said in a report.

Morgan Stanley notes that households in the U.S., Japan, European Union and U.K. cut debt since the global financial crisis. But it says that masked record debt build-ups in Australia, Canada, New Zealand, Sweden and Switzerland.

The report suggests that Australia will probably enter a “benign deleveraging phase” because of its strong global economy and public infrastructure spending. Still, the risk of a longer than usual recession “remains elevated” as regulators impose so-called macroprudential measures that will tighten lending standards and slow credit growth.

In the case of Canada, the risks come from a combination of falling house prices, rising interest rates and weaker credit growth. In Sweden, the flashpoint is a drop in property prices.

Morgan Stanley estimates that household debt in the 10 largest developed economies has surged to 160 per cent of income from 98 per cent over the past two decades. That could have consequences for monetary policy if the trend is suddenly thrown in reverse.

“The increasingly proactive use of macroprudential tools and greater inflation-target flexibility in some countries will lead to more gradual rate-hiking cycles, with lower neutral rates in the medium term,” it said.