In an economic report released this month, the Organisation for Economic Co-operation and Development (OECD) warned that the rapid growth in Australia’s house prices could be a precursor to an economic downturn. 

In an otherwise positive assessment of Australia’s economy, the OECD noted in its biennial survey that house prices have increased by 250% since the mid-1990s.

“House prices and household debt have reached unprecedented highs, in part because policy-rate cuts have lowered debt servicing costs (most housing loans are set at variable interest rates),” the report said.  

The OECD also highlighted the nation’s housing affordability crisis, noting that the ratio of house prices to incomes has undergone further increases in recent years, straining affordability, particularly for first-home buyers in Sydney.

And while foreign demand for Australian property has been much maligned for pushing up house prices in the eastern capitals, the report said that foreign demand for housing, while a contributing factor, “does not appear to have had a substantial impact on price growth.”

Added to the mix are ominous signs that the housing market is cooling. “Recent data indicate price growth has eased in most urban centres, reflecting in part a substantial supply response – dwelling approvals and investments have increased substantially in recent years. However, the significant increase in Australia’s house prices and price to income ratios remains,” the report said.

The Paris-based organisation warns that a continued rise of the market, fuelled by both investor and owner-occupier demand, may lead to a significant downward correction that would spread to the rest of the economy.

Other risks facing the Australian economy include the US interest rate policy, the ongoing fallout from the EU referendum, rising international protectionism, and the performance of China—though the OECD believes Australia is well-positioned to handle such potential shocks.

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