The OECD thinks Australia's housing market is headed for a soft landing

• The housing market is expected to have a soft landing, says the OECD in its annual assessment of Australia.

• It says a wave of mortgage defaults is unlikely.

• And the OECD expects interest rates to start rising soon.

---

The falling housing market poses a risk to Australia's economy but a "soft landing" is more likely than a crash, says the OECD (Organisation for Economic Co-operation and Development).

"Australia's housing market is a source of vulnerabilities due to elevated prices and related household debt," says the OECD's 2018 Economic Survey of Australia.

"House prices have fallen, although only gradually since late last year; the current trajectory would suggest a soft landing."

The OECD points out that soft landings are rare and a risk of an overshoot in the price correction -- a hard landing -- remains.

House prices have turned lower, as this chart shows, but household debt is still high.

Housing sales are tumbling across Australia, especially in the capital cities. Home prices in Sydney have fallen for 16 consecutive months, leaving median prices down 9.5% in nominal terms.

The OECD says a direct hit from a wave of mortgage defaults is unlikely.

"However, if house prices collapse consumer spending could suffer, via negative impact on wealth, including from exposures to bank shares, which would encourage deleveraging," it says.

"Together with reduced housing-related expenditures, this would put pressure on the whole economy.

"Financial supervisors and bank regulators should be prepared in the event of a hard landing in the housing market. They should also continue to address shortcomings in the financial sector identified in recent inquiries, particularly competition, misconduct and fraud."

The OECD expects interest rates to start rising soon.

"Monetary conditions remain very accommodative, with the risk of imbalances accumulating further if the low-interest rate environment persists. In the absence of a downturn, a gradual tightening should start as inflation edges up and wage growth gains momentum."

Overall, the OECD forecasts Australia's long span of positive output growth to continue with economic growth running at 3%.

The OECD forecasts:

"The labour market has been equally resilient, with rising employment and labour-force participation," says the OECD.

Risks to the outlook relate to the housing market, and uncertainty in export demand due to rebalancing in China and potential escalation of international trade disputes.

"Monetary policy tightening will be required as the pick-up in wages and prices gathers pace," says the OECD.

"Risks from the housing market and high household indebtedness warrant continued vigilance.

"The government is projected to reach a budget surplus in 2019, giving sufficient room to support activity and protect the incomes of vulnerable groups in the event of an unexpected downturn."