Australia's financial stewards and bank regulators should be prepared for a hard landing in the housing market, according to the world's leading economic agency.
In its latest assessment of Australia, the Organisation for Economic Co-operation and Development says the housing market poses a risk to the nation's economic growth going forward.
That comes amid elevated house prices and related household debt, the Paris-based group said in a report released on Monday.
"Domestically of course there is the risk, possibly small, of a hard landing in the housing market," OECD Senior Economist Phil Hemmings told SBS.
House prices have fallen gradually since late 2017 and the market is on trfor a soft landing, the OECD said, but it stressed some risk of a hard landing remains and regulators should be ready for the scenario.
"Financial supervisors and bank regulators should be prepared in the event of a hard landing in the housing market," the report states.
House price risks to economy but Australia is probably facing a 'soft landing' ahead. Source: AAP
Regulators should also turn their attention to ensuring accountability, transparency and competition among financial institutions after the banking royal commission, the OECD has recommended.
But the agency has found life in Australia is ultimately rosy as its long span of economic growth - 27 consecutive years - continues.
"Life is good, with high levels of well being, including health, and education," the group said in its latest Australian economic survey.
Aside from the housing market, the agency said risks to the growth outlook include uncertainty around export demand - due to rebalancing in China - and the potential escalation of global trade tensions.
Challenges in boosting productivity - which involves increasing the value derived from the work and resources put into the economy - are also a risk.
The OECD, which has 36 member nations, has called for interest rates to be gradually lifted as growth continues and inflation slowly rises.
The Reserve Bank of Australia has kept the official cash rate at its record low of 1.5 per cent since August 2016 and has signalled that's not likely to change for some time.
Challenges in boosting productivity - which involves increasing the value derived from the work and resources put into the economy - are also a risk. Source: AAP
The OECD has also recommended that the federal government maintain fiscal discipline, bringing the budget back to surplus and building on the result by bucking pressure to lift public spending.
"No further consolidation would bring only slow reduction in public debt-to-GDP ratio," the report says.
The Liberal-National government has vowed to deliver a surplus in its next budget in April.
Treasurer Josh Frydenberg said the report recognised the "strength of the Australian economy".
"The OECD notes house prices have gradually cooled, stating “the current trajectory would suggest a soft landing”, but warns, “A large drop in house prices could cut household consumption, prompt collapse in the construction sector, increase mortgage defaults and freeze back lending to businesses."," he said.
"Labor’s housing tax policies will do just this. They will damage Australia’s housing market and destroy the equity that people."
Treasurer Josh Frydenberg says a slowdown in growth won't affect the predicted 2019 budget surplus. Source: AAP
Although Australia has demonstrated a "remarkable capacity" to increase living standards and absorb economic shocks, the OECD has stressed socio-economic challenges remain.
Some groups of people are vulnerable as they face low workforce participation and a high risk of poverty, the agency said.
"The substantial gaps between Indigenous Australians and the rest of the population are narrowing too slowly."
The nation's climate change policy also still lacks clarity and stability, the organisation said.
With AAP
