Economists are warning that the housing market is becoming over-supplied, which will place more pressure on falling house prices.
Net migration has been falling even faster than house building has slowed, meaning fewer houses are needed.
Westpac chief economist Brendan O'Donovan says as oversupply sets in, investment will slow, adding further momentum to price declines.
O'Donovan predicts the excess supply of houses will reach 5000 by mid-next year.
"That will add even more weakness to house prices for some time to come," he says.
Gareth Kiernan, managing director of Infometrics, says an excess supply of 5000 houses nationally will be historically large, but still smaller than experienced in the past three downturns. In 2000 there was an oversupply of about 9600 houses.
Developers will take a hit first, says Kiernan, as they face daunting holding costs on unsold properties. This could make it cheaper to buy a new house than a secondhand one.
Despite the "massive" construction boom earlier this decade, O'Donovan says New Zealand does not have a glut of houses. He describes the local situation as "moderate", with the oversupply developing because of low population growth rather than a wild increase in house building.
Kiernan says oversupply will be more evident in sectors such as the apartment market.
Some regions are more vulnerable to oversupply than others as high levels of building during the boom combine with shrinking populations in places such as in Taranaki, Manawatu and Wanganui.
By contrast, in Auckland, high interest rates and rising prices for necessities are reducing people's ability to pay high house prices or afford rising rents.
There is already a glut of homes on the market. Housing sales dropped by 50 per cent in March compared with the same time last year. "We're holding more properties than ever, but that's not because there are more listings occurring, it's because there are fewer sales," says the chief executive of Ray White, Carey Smith.
"When that's the case, there's a build-up of stock each month, and that compounds on current listings."
The emergence of a housing oversupply also implies the level of residential building will fall.
O'Donovan expects residential construction to go through a "marked slow-down" over the course of this year, and activity next year to be about 11 per cent lower than last year.
Economists expect this to flow through to the labour market.
An ANZ National Bank forecast says the bank will watch sectors linked to the housing market and related pockets, expecting to see early signs of a softening in the labour market.