My view?

New Zealand's housing market is running out of puff, judging by the latest figures from REINZ.

Volumes are down 17 per cent from a year ago and the demand that surged through in early 2009 is now ebbing away as interest rates rise and rental property investors digest the impact of the changes in the Budget 2010.

The best indicators of what might happen next are in the most recent bank lending figures. This chart here shows just how connected the housing market and housing credit growth has been.

The red line represents the value of house sales each month, which surged to as much as NZ$3 billion at the peak of the housing boom, while credit growth to households rose to just over NZ$2 billion at the peak. They tracked in line throughout the housing boom as credit pumped air into the housing bubble.

However, since the Global Financial Crisis erupted in mid 2008, that relationship between credit growth and the value of house sales has broken down. The gap between the value of house sales (the red line) and the value of credit growth (the blue line) is the size of the saving that New Zealand households are now doing.

Currently New Zealanders are saving around NZ$1.5 billion a month. That is money that's not being spent on new housing, renovations and the consumer spinoffs that go with it. We have shut down the ATMs in our houses.

The Reserve Bank highlighted this chart when it said New Zealanders were saving more, rather than pushing more money into housing and consumption. Many home owners are repaying their mortgages faster than they have to, or are 'trading down' by selling expensive houses to buy cheaper houses and repaying the difference.

The comments from ASB's Jane Turner about migration are also interesting. As more New Zealanders head across the Tasman for work, the net migration surge that helped the market rebound last year is sliding away. That will kick one prop out from under the housing market.

In early 2008 I argued that house prices would drop 30 per cent from their peak over the following two years.

That didn't happen as the Reserve Bank provided lending support to the big banks here, Australia's government provided a deposit guarantee, the Official Cash Rate was slashed from 8.25 per cent to 2.5 per cent and our unemployment rate stayed relatively low. An extraordinary effort by the powers-that-be prevented a collapse. I revised my forecast last year to a 15 per cent fall in house prices from the peak and over a longer period.

The artificial pumping of air into the market through late 2008 and early 2009 helped hold prices above their 'natural' level during the crisis. Now the artificial air is leaking out after the crisis, the housing market is starting to subside, albeit slowly.

The 'natural' level of house prices that is sustainable over time is best measured by affordability. Our measure of the proportion of after tax median pay needed to service an 80 per cent mortgage on a median house is still around 60 per cent.

Household income levels are still well over 5 times house values in many of the big cities. That is plainly unsustainable, particularly as the credit that fuelled the bubble is slowly withdrawn.

Today's figures show the stratified measure of house prices is down 5 per cent from its November 2007 peak and down 11 per cent in real terms once inflation is taken into account.

I still think we've got another 10 per cent to fall in actual terms. That may take a few years. Meanwhile, real prices will fall even further. Once the inflation surge of late 2010 and early 2011 is taken into account, real house prices are likely to be down almost 20 per cent by the end of next year.

That may shake the faith of the ever faithful who have sworn by housing for years and who mocked the doomsayers like me.