KEY POINTS:
Treasury has become more pessimistic about the economic outlook for householders, predicting that a slowing housing market will have many people feeling the pinch.
Last week, the Reserve Bank foreshadowed a gloomy time for households, indicating interest rates were unlikely to fall until late next year and forecasting house prices would fall on average by 5 per cent this year.
Treasury's monthly economic indicator bulletin said the housing market had weakened considerably since late last year as borrowing costs increased and the increase in net migration declined.
Pressure on households was increasing as the number of lower fixed term mortgages expired and had to be reset at higher rates.
Fewer migrants reduced demand and the strong local employment market was unlikely to be able to support current house prices, Treasury said.
Many households had been borrowing on the increased equity in their homes and this would be much for difficult in the future.
Treasury had been predicting a downturn in household spending and a "moderation" in the housing market.
"It is now apparent that both annual growth in residential investment and houses prices will be declining sooner than previously thought."
Treasury said this should slow both the labour market and inflation.
Drought and slowing economic growth in the United States and Europe would subdue New Zealand's growth, Treasury said.
The Reserve Bank estimated nearly a third of mortgagees on fixed rates will have to refinance in the next 12 months and, on average, they will have to pay between 0.7 and 1.5 percentage point higher rates.
Inflation was expected to peak at 3.6 per cent in September before coming back within the bank's target band of 1 per cent to 3 per cent next year.
- NZPA
