Mr Chaney was speaking exclusively to The Australian Financial Review on the sidelines of a University of WA business forum to discuss economic and social policy, including the issues of political instability, investment and housing affordability.

The former Woodside chairman told the forum that although the housing markets in the two biggest cities had fallen from sky-high levels in the past year – 5.6 per cent in the case of Sydney after a rise of more than 70 per cent over five years and 3.5 per cent in Melbourne after a 57 per cent rise over the same timeframe – that change would have a significant impact on consumer spending.

"It [falling house prices] has the potential to cause a recession, to cause a recession in spending in the retail sector, and it has been underestimated," he said.

Reserve Bank of Australia head of economic research John Simon acknowledged the risk and said the RBA was constantly revising its modelling to take into account the impact.

"The best we can say is that it hasn't changed a whole lot [so far]," he told the forum.

Political uncertainty bad for growth

Dr Simon said the falls to date were relatively small but did have a wealth effect on households.

However, he said the concept of houses being worth less appeared to have a smaller impact on sentiment than cash-flow issues around the size of pay packets and interest rate rises.


Mr Chaney also warned it might take a recession to bring about meaningful corporate tax reform in Australia after the federal government's most recent failed attempt.

Lamenting the fact that Labor Leader Bill Shorten had used corporate tax cuts as a weapon to attack deposed prime minister Malcolm Turnbull, Mr Chaney said: "It seems very clear to me that if you have 30 per cent tax rate and others have a much lower tax rate, you are going to get an outflow of capital."

He said recent upheavals in Canberra created a climate of uncertainty that was bad for investment and bad for economic growth.

"It causes people basically to keep their hands in their pockets," he said.

Mr Chaney said he did not expect any significant progress on industrial relations reform in the next term of government despite new Prime Minister Scott Morrison talking tough on the issue and warned a Labor government could put the reform process into reverse.

He said there was no groundswell for reform outside the building industry given the relatively low level of industrial disputes and low wages growth.