Regulators should prepare contingency plans for worst-case scenario, economic group says in otherwise positive report on Australian economy

This article is more than 1 year old

This article is more than 1 year old

Australia’s financial regulators should be prepared for a hard landing in the housing market, according to the world’s leading economic agency.

In its latest assessment of Australia, the Organisation for Economic Co-operation and Development says the housing market poses a risk to the nation’s economic growth.

That comes amid elevated house prices and related household debt, the Paris-based group said in a report released on Monday.

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House prices have fallen gradually since late 2017 and the market is on track for a soft landing, the OECD said, but it stressed some risk of a hard landing remains and regulators should be ready for the scenario.

“Financial supervisors and bank regulators should be prepared in the event of a hard landing in the housing market,” the report states.

Regulators should also turn their attention to ensuring accountability, transparency and competition among financial institutions after the banking royal commission, the OECD has recommended.

But the agency has found life in Australia is ultimately rosy as its long span of economic growth – 27 consecutive years – continues. “Life is good, with high levels of wellbeing, including health and education,” the group said.

Aside from the housing market, the agency said risks to the growth outlook include uncertainty about export demand – owing to rebalancing in China – and the potential escalation of global trade tensions.

Challenges in boosting productivity, which involves increasing the value derived from the work and resources put into the economy, are also a risk.

The OECD, which has 36 member nations, has called for interest rates to be gradually lifted as growth continues and inflation slowly rises.

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The Reserve Bank of Australia has kept the official cash rate at its record low of 1.5% since August 2016 and has signalled that’s not likely to change for some time.

The OECD has also recommended that the federal government maintain fiscal discipline, bringing the budget back to surplus and building on the result by bucking pressure to lift public spending.

“No further consolidation would bring only slow reduction in public debt-to-GDP ratio,” the report says.

The Coalition 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 socioeconomic challenges remain.

Some groups of people were vulnerable as they faced low workforce participation and a high risk of poverty, the agency said. “The substantial gaps between indigenous Australians and the rest of the population are narrowing too slowly.”

The nation’s climate change policy also still lacked clarity and stability, the organisation said.