Australia must be prepared for a hard landing in the housing market that could cause financial instability and hamper economic growth, the world’s leading economic agency has warned.
The Organisation for Economic Co-operation and Development’s latest assessment of Australia points to elevated levels of household debt after years of booming prices.
But house prices have fallen since late 2017 and while the market is on track for a soft landing, the risk of a hard landing remains and regulators should be ready for the fallout.
“Financial supervisors and bank regulators should be prepared in the event of a hard landing in the housing market,” the Paris-based group said in a report released on Monday.
“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.”
Treasurer Josh Frydenberg used the warning to attack the Labor opposition over its policy to rein in negative gearing tax breaks for housing investment.
“They will damage Australia’s housing market and destroy the equity that people hold in their homes, increasing the risk of financial instability and lower economic growth,” Mr Frydenberg said in a statement on Monday.
Regulators should also turn their attention to ensuring accountability, transparency and competition among financial institutions after the banking royal commission, the OECD recommended.
But the agency has found life in Australia is still rosy as its 27 consecutive years of economic growth 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.
The OECD 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.
The OECD also recommended the federal government bring the budget back to surplus.
The Liberal-National government has vowed to deliver a surplus in its next budget in April.
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 nation’s climate change policy also still lacks clarity and stability, the organisation said.
Shadow treasurer Chris Bowen said the OECD report shows Australia needs to be more prepared for uncertain international times than the coalition is allowing for.
“There’s no room for complacency when it comes to the budget or to the economy,” he told reporters in Sydney.