KEY POINTS:
Sales of cars, electronics, furniture and appliances could suffer next year from the housing sector downturn and the string of collapses in the finance sector.
Economists are beginning to wonder if housing - the driver behind a consumer spending splurge in the last few years - could soon become the economy's Achilles heel.
Goldman Sachs JBWere economist Shamubeel Eaqub said consumer spending could take a big hit from the double-whammy of a residential slump and fallout from finance company collapses.
The residential construction sector could also dip - from building about 25,000 houses annually to 21,400 next year.
Eaqub is predicting stricter lending practices will come into force, which he said could lead to a reduction in the credit available for purchases such as home furniture, appliances and motor vehicles.
The wealth effect - caused by people being richer on paper as their house values rise - could turn around, affecting consumer spending.
His comments followed data released by Barfoot & Thompson in Auckland last Thursday showing houses in the city taking longer to sell, prices decreasing and a much lower volume of house sales - a trend which has been gathering pace throughout most of this year.
Eaqub is expecting Real Estate Institute data due out in the next few days to show lower volumes, prices flattening and people taking longer to sell properties.
"I'd be very surprised if the annual change in the REINZ numbers were not fairly negative as well," he said.
"The main consequences of the housing market slowing down are twofold: residential construction will be softer next year and consumer spending will suffer."
Various estimates had found housing was overvalued by between 10 per cent and just over 60 per cent, depending on which measures were used, he said.
But other economic indicators are still extremely strong, he said.
The income survey released by Statistics NZ last week showed that in the June year, average income from all sources rose by 9.5 per cent and the main contributors were income from wages (5.4 per cent) and investment income (2.8 per cent).
"Nevertheless the average annual income remains modest at $34,700 annually ($46,400 for those in employment compared to $12,300 for those not) and the median house of $350,000 is extremely unaffordable.
"At 95 per cent gearing, the current two-year rate for a 30-year term would equate to mortgage payments of $32,400 or 94 per cent of income," he said.
Westpac's latest quarterly economic overview said changes in the housing market could have wider economic implications.
"Consumers' insatiable demand in recent years has been fed by rising house prices and the associated increase in household wealth. With annual house price growth now forecast to slow and perhaps turn negative, consumption growth faces a significant obstacle," Westpac said.
"Sure we are expecting very healthy income growth over the coming year which will help boost spending. But we expect at least part of that extra income will be saved.
"By mid-2008, consumers will be battling a range of negatives, including higher food and energy prices, higher rents and significantly higher mortgage rates."
BNZ chief economist Tony Alexander has highlighted the extremely strong employment figures, noting that an extra 368,000 jobs had been added to the economy since 1999. This has reduced unemployment to 3.6 per cent. Interest rates also remained relatively low but he is picking the housing market to remain flat for the next two years.
ANZ chief economist Cameron Bagrie says data from REINZ tend to track Barfoot & Thompson figures.
Next year's retail sales outlook will be affected by the residential sector's fortunes but high levels of employment and job security would continue to fuel consumer spending, Bagrie said.
GOING UP NEXT YEAR?
* Rents and interest rates
* Household energy bills
* Food prices
GOING DOWN NEXT YEAR?
* House prices
* The wealth effect
* Consumer confidence
