The Australian economy could be dragged down by a house price crash so widespread the federal government would have to prop up some of the nation's biggest banks, the OECD has warned.
In a major departure from its past assessments of the Australian economy, the Paris-based think tank has cautioned the Morrison government to start planning now for a house-price induced downward spiral that would end the nation's unparalleled run of growth.
Every 18 months the OECD speaks to key players in the Australian economy, delivering a snapshot of current trends and what may be ahead.
The OECD has warned the federal government to prepare for the effects on the economy if housing prices fall.CREDIT:ROB HOMER
The latest survey of Australia, released on Monday morning, shows growing unease both within the OECD and major local institutions about the housing market.
House values in Sydney have dropped by 9.6 per cent since their most recent peak, while in Melbourne they have slipped by 5.8 per cent. But in Perth, where the median house price matched Sydney in 2008, prices have barely moved over the past decade.
Noting the recent falls in prices, the OECD said if price falls continued there would be a knock-on effect to consumers which would lead them to wind down their spending.
"A direct hit to the financial sector from a wave of mortgage defaults is unlikely," it warned.
"However, if house prices collapse consumer spending could suffer, via negative impact on wealth including from exposures to bank shares, which would encourage deleveraging."
Together with reduced housing-related expenditures, this would put pressure on the whole economy.
Last week's poorer-than-expected national accounts showed the household savings ratio at its lowest level since the global financial crisis, and damp consumer spending with people now putting more of their cash towards necessities.
Car sales, a key indicator of consumer health, dipped to their lowest level since the start of 2016.
Treasurer Josh Frydenberg on Sunday described the overall economy as "good" and has argued the fall in household savings is due to the confidence of consumers.
While the OECD believes the Australian property market will make a "soft landing", even it concedes they are "rare".
The OECD said the Morrison government should "prepare contingency plans" for a possible correction across the housing market that could leave the banking sector at threat.
Such a plan could including the public sector absorbing the losses of a private bank in a policy that would effectively borrow from the way American and European authorities dealt with the financial fall-out of the global financial crisis period.
"The possibility of a financial institution crisis should not be discounted entirely," it said.
"Australia faces economic challenges that, if not handled well, could see an end to its strong track record."
The organisation expects economic growth to moderate to 2.9 per cent next year from 3.1 per cent, adding that this could deteriorate if the current US-China trade dispute remains unresolved.
Outside of the housing market, the OECD used its review of the economy to chide the federal government for its work on reducing greenhouse gas emissions.
Saying Australia needed to "stabilise and strengthen climate change policy", the organisation effectively blamed the government for its policy missteps around energy and emissions.
"Australia has made little progress in reducing its environmental footprint in large part because frequent changes in core climate change instruments have created uncertainty for emitters, which has also discouraged energy security investment," it said.
