Economist predicts long fall in Aussie house prices

In a new analysis, the Dutch-based bank's chief economist in Australia, Kieran Davies, said house prices had entered a period of decline, which was needed to bring prices back towards their normal relationship to household income.

The housing bubble almost doubled household wealth between 1998 and 2004, creating a "confidence effect" in which consumer spending boomed. As that process goes into reverse, Mr Davies warned, it will damp consumer spending and economic growth.

It could put a significant brake on economic activity, he said. Household spending accounts for 60 per cent of demand in the economy, and in recent years it grew faster than household incomes. Households now spend more than they earn.

"The economy is facing a period where declining household wealth should be a significant and ongoing drag on growth as the massive bubble in house prices slowly deflates," he said.

Economists predict that this week's economic data will show the unemployment rate has risen for the first time in four years.

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