Treasurer Scott Morrison has rejected fears of a housing shock as an international report warned of a market correction which could spread to the whole economy.
The Organisation for Economic Cooperation and Development said Australian house prices had increased by 250 per cent in real terms since the 1990s and a downturn could cut household consumption and lead to mortgage defaults.
"A continued rise of the market, fuelled by both investor and owner-occupier demand, may end in a significant downward correction that spreads to the rest of the economy," the Paris-based body said in the biennial survey.
The authors said that while there were signs that the housing market was cooling, "the significant increase in Australia's house prices and price to income ratios remains", with affordability for first-time buyers a major issue in Sydney.
Mr Morrison said the government was working on a housing affordability package, with cooperation from the states and territories and local government, to be released in the May budget.
He said reports from "northern hemisphere organisations" did not appreciate the supply-demand imbalance in Australia, which needed to be addressed through the opening up of more new homes for buyers.
"The only way you get a housing shock in this market if you have the Labor party policy of taking a tax sledgehammer to the housing market," Mr Morrison told reporters in Sydney on Friday.
"Housing affordability needs a comprehensive response."
Shadow treasurer Chris Bowen said there was a strong argument for reforming negative gearing, the most generous tax concessions for property investment in the world.
"Right across the country, young people are wondering how they will ever afford to get into the housing market," Mr Bowen told reporters in Sydney.
He said the government was "flipping from thought bubble to thought bubble".
Housing market expert Dr Andrew Wilson said he expected house prices to moderate.
"We've already started to see signs of that already, but clearly we have a multi-speed housing market - strong in Sydney, pretty strong in Melbourne, but just so-so in the rest of the country," he told the ABC.
The Reserve Bank is expected to leave the cash rate of 1.5 per cent on hold when it meets next Tuesday.
