Be prepared for a housing market price dive, OECD warns Australia

[SYDNEY] Soft landings in housing markets are rare and Australia should be ready to respond to the risk of a significant price dive, the Organisation for Economic Co-operation and Development (OECD) said.

In its latest survey of Australia, the Paris-based group forecast economic growth of 2.9 per cent next year, leading to a gradual pickup in wages and inflation. While it said the housing market's cooling was so far orderly, it warned that high property prices and household debt were potential instabilities.

"Risk of an overshoot in the price correction - a hard landing - remains," the OECD said in its report. "Estimates of housing valuation are highly uncertain" and "past OECD work has found soft landings are rare."

Australia's house-price decline is centred on Sydney and Melbourne and reflects credit curbs and increasingly nervous buyers. But unusually, the drop is happening against a backdrop of record-low interest rates and strong hiring; whereas historically, property downturns occurred when rates were high, growth was slowing and unemployment rising.

Past falls in the housing market were halted when policy easing encouraged buyers to return. Interest-rate cuts are less likely now -- and with the cash rate at a record-low 1.5 per cent, the Reserve Bank has limited ammunition.

"The authorities should prepare contingency plans for a severe collapse in the housing market," the OECD said. "These should include the possibility of a crisis situation in one or more financial institutions."

Other Key Recommendations:

If the upswing in economic activity continues and inflation is projected to rise gradually, then authorities should gradually remove monetary accommodation through a policy rate increase

Misconduct and a lack of competition in the banking sector requires regulators to "assure strong accountability, transparency and competition in the financial sector"

With the budget deficit reduction on target, continued fiscal discipline is required and the government needs to ensure fiscal balances remain on track to reach surplus

Like the IMF before it, the OECD recommended a further shift in the tax mix from direct taxes - such as corporate and personal - and inefficient ones toward a higher goods and services tax and land taxes.

BLOOMBERG