The OECD's latest review says house prices have increased by 250 per cent - in real terms - over the last two decades.
It has cautioned that any rapid downturn would be disastrous for the economy.
But Treasurer Scott Morrison has rejected the warning and says the economic survey fails to properly assess the landscape.
"Well I've always found with assessments often from northern hemisphere organisations that they don't always quite appreciate the supply demand and balance here in Australia."
He added that the Turnbull Government is working on a housing affordability package, but Australians will have to wait for the details be released in the May budget.
The Paris-based body says a continued rise of the market, aided by investor and owner-occupier demand, could result in a significant downward correction that spreads to the rest of the economy.
One it's biggest concerns is that if iron-ore and coal prices plummet, so too, will property prices which would lift unemployment and mortgage stress.
"The OECD also said something today and they warned about the effect of a housing shock and the only way you get a housing shock in this market is if you've got the Labor party's policy of taking a tax sledgehammer to the housing market. "
The sledgehammer the Treasurer refers to is Labor's plan to reform negative gearing, the most generous tax concession for property investment in the world.
The Opposition's Treasury Spokesman Chris Bowen seized on the report pushing Labor's case for reform, which it says would help young people get into the housing market.
"Right across the country, young people are wondering how they will ever afford to get into the housing market. Commentators, experts have pointed out the budget is in need of repair and negative gearing reform helps repair the budget."
Mr Bowen said the Government was flipping from policy thought bubble to thought bubble and should work with his side of politics to implement reform.
Treasurer Scott Morrison says that won't be happening.
"Bill Shorten and Chris Bowen are putting out a very cruel hoax on young Australians who want to buy a house. They're saying you'll be able to buy a house anywhere you want for the price you want, and all you have to do is put up taxes. Now I think that is a very simplistic and disappointing view."
Housing market expert Dr Andrew Wilson says house prices in the hot spot major cities are expected to calm down as they have elsewhere in the country.
"Certainly there's a multi-speed market. Melbourne and Sydney well ahead of the rest, in fact in Perth we've got house prices at three or four year lows at the moment. But there's no secret that lower interest rates have been the clear catalyst for higher prices."
Those interest rates are expected to be left on hold when The Reserve Bank meets next Tuesday.
