KEY POINTS:
Falling house prices could make homeowners feel a lot poorer and might mean they spend much less in future.
Treasury has examined the risks of our roller-coaster residential ride coming to an end and reckons tougher times are ahead.
New Zealanders could slash discretionary spending on items like new flat-screen TV or the latest home computer if the Government's leading advisor on economic and financial issues is right.
In budget documents out yesterday, Treasury released its forecast of house prices saying they could drop 7 per cent by March 2009.
But it warned the decline could be more drastic because net migration could be lower than forecast and debt servicing might become more difficult if there was further turmoil in financial markets.
"A more rapid drop in house prices than forecast could lower the consumption profile by making people less wealthy and also by lowering the value of collateral to borrow against," Treasury said.
That could mean we buy fewer televisions, dishwashers and other home appliances or electronics.
"A weaker housing market would also decrease demand for consumer durables to furnish new houses. A larger fall in house prices would also be indicative of a greater slowing in the housing market, for example in house sales, resulting in a sharper fall in residential investment than forecast."
If food prices continued to rise and migration wound down further, the housing market could be even weaker than Treasury is forecasting.
Greg Haddon of Deloittes in Auckland backed the Treasury analysis, saying people were already tightening their belts because of house price falls.
Economist Rodney Dickens has referred to the need for a 40 per cent house price drop to get some balance back in the market.
