RESEARCHERS have warned the NSW economy's boom may come to an end as surging property prices in Sydney show signs of slowing.
Commsec's October State of the States report ranked NSW as the country's best performing economy, citing retail trade, population growth and housing approvals as its key drivers.
The NAB State Economic Handbook also suggested "domestic demand will be strongest in New South Wales and Victoria, the states experiencing the fastest growth in residential property prices and construction and which have the most diversified industrial bases".
But a new Parliamentary Research Service study has found house price growth in Sydney slowed over the past three months, though it still increased 3.2% to a median of $1.03 million.
"History, however, shows that the aftermath of Sydney property booms can have a dampening effect on the economy," researcher Andrew Haylen said.
READ MORE: NSW housing approvals at record high
"The city's last great property boom, which lifted the median house price by about 160% between 1997 and 2003, was followed by a long period of economic underperformance by the state."
Mr Haylen said the economy was likely to undergo a downturn despite a weaker dollar and lower interest rates working in the state's favour.
"High levels of household debt coupled with a downturn in housing could further crimp consumer spending and property investment once the Reserve Bank of Australia was forced to tackle inflation by lifting interest rates," he said.
"In this context, other areas of the state economy - particularly non-mining business investment - will therefore need to perform over the longer run if economic growth and improved labour market outcomes are to be sustained once the housing sector slows."
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