House prices in New Zealand have fallen 6.8% on a year earlier according toe QVNZ (for November). Given that inflation was running at somewhere around 4% during this time this implies that the real value of houses has fallen by around 11%.
Now, prior to the recent crisis, households based decisions on the (wrong) assumption that house prices would continue to appreciate. As a result, relative to what has happened, household have “over-borrowed”. The sharp pullback in consumption is their rational response to the sharp decline in households expected lifetime wealth.
This is consistent with David Rosenberg’s view of what is happening in the US economy. (here is a version of the report)
If this is the primary factor behind the sharp drop in economic activity then this implies two things:
- We can expect further drops in consumption as house prices moderate over 2009,
- This household rebalancing process has to occur (unless we expect expectations of household wealth to overshoot on the downside) and so there is nothing that the government can do to help us.