The warning from the Organisation for Economic Cooperation and Development (OEDC) came in its latest economic report on Australia.
Australia's benchmark interest rate is at an historic low.
But cheap credit has fuelled a housing bubble in some cities, warn analysts.
In May, the Reserve Bank of Australia (RBA) cut its key interest rate by 25 basis points to an all-time low of 2%.
Rising property prices in Australia's biggest city, Sydney, a strong currency and a drop in iron ore prices were among the reasons for the cut.
But Australia's treasury secretary John Fraser said earlier this week that Sydney was "unequivocally" in a housing bubble.
A shortage of new houses, cheap credit and generous tax breaks, together with money from overseas investors, have sent the city's housing prices sky high.
Home prices across some of the country's biggest cities have surged as much as 40% in the past three years, but the OECD warned that continuing momentum in Australia's property market added "to the risk of a sharp correction".
Given Australia was adjusting to its post-mining boom landscape, and considering the downside of rate cuts, the OECD said the country should continue to support investment in non-commodity sectors, among other areas.
It also said it should consider measures to boost competition, cuts to red tape and tax reforms in order to help boost growth.
The OECD's latest report said Australia's growth would likely dip to 2.25% in 2015, but that it would pick up to nearly 3% in 2016.
On Wednesday official numbers from Australia showed the economy grew at a better-than-expected 0.9% in the first quarter of 2015, compared to the previous quarter, boosted by mining together with financial and insurance services.
On an annual basis the economy expanded 2.3%, beating expectations for 2.1%.
But economist Shane Oliver from AMP Capital told the BBC the numbers were "well below potential".
He also said the Reserve Bank of Australia "may yet still have to cut interest rates further into record low territory" to help boost growth.
Australia has been cautioned by the OECD to keep further interest rate cuts "in reserve" and that the country's booming housing market could be at risk of a "sharp correction".