Analysts say the vast number of households affected by the downturn would have a "hefty impact" on the largest sector of the economy – consumer spending.

"That's nearly 1 million people, which would be almost 10 per cent of households – it's a significant number and that's not including Perth or Darwin where property prices have also fallen," AMP Capital chief economist Shane Oliver said.

"These are people who would be under water in terms of their purchase, although not necessarily equity, and there would be another group of people who bought in 2013 who are now finding they are only a little bit ahead." Mr Oliver said.

Based on recent RBA estimates that a 10 per cent rise in housing wealth increases consumption levels by "3-4 per cent in the short run" Mr Oliver said people's perceptions of their declining wealth would have a "hefty impact" on what is the biggest sector of the economy.

"Prices are already off 13 per cent [in Sydney] and we are only halfway through it, so if they fall 25 per cent from top to bottom you are looking at a hit to consumer spending – spread over a few years – of 2.5 per cent," Mr Oliver said.

"Consumer spending is about 60 per cent of GDP in Australia, so that's effectively knocking off 1.5 per cent of GDP spread out over a few years."

'We are already concerned'


The latest ABS figures show domestic consumption growth at 2 per cent, its slowest annual pace since 2013, prompting concerns that falling house prices are already affecting household spending.

"We think there's been a significant overlap between the housing market and consumption behaviour so we are already concerned and have forecast consumption to slow on the basis of the house price declines as well as the fact there's less access to credit," JP Morgan economist Ben Jarman said.

Mr Jarman said it was not so much debt-to-equity but the high debt-to-income levels of borrowers that would dictate the performance of the housing market and economy more broadly.

"Households have relied a lot on the balance sheet to get them through a period of pretty weak income growth and support consumption and that's no longer feasible. That's what is a worry. It could generate a bad feedback loop because obviously if consumption slows sufficiently then the labour market starts to slow and it all starts to feed on itself."

But investor Wycee Kohr, who has bought two properties in the last two years – one in Sydney's west for $920,000 and another in Brisbane for $400,000 – isn't convinced by the "wealth effect" argument.

"I have three daughters and we just bought a dog," he laughed. "I don't think I'm going to be cutting back."


Labor reforms going ahead

Tim Lawless, CoreLogic's head of research said it was investors, particularly those who had bought at the peak, and buyers of off-the-plan apartments who would be "feeling the most pain" right now.

"The marketplace – particularly for off-the-plan units – has been very much skewed to investment in Sydney and Melbourne, with investor numbers peaking in 2015," Mr Lawless said.

"In the next two years we will see a a record number of apartments going into the settlement phase and many of those buyers will be finding that the valuations on their purchases will be below the contract price," he said.

The vast number of households potentially affected by the downturn hasn't discouraged the Labor Party from going ahead with their plans to limit negative gearing to newly-built properties in the event they win the federal election.

"Many economists have pointed out that the current housing market circumstances that include many investors sitting on the sideline, make now a better time to reform negative gearing and the capital gains tax discount," a spokesperson for shadow treasurer Chris Bowen said on Friday.

With Lucas Baird