The expected nine per cent fall in house prices could "potentially" be worse, says Reserve Bank Deputy Governor Geoff Bascand.
However, it would still not be enough to leave households "really stretched" as the country begins its economic recovery after the Covid-19 lockdown.
Mr Bascand told TVNZ1's Q+A with Jack Tame that a 9-10 per cent fall in house prices, forecast last month , was almost the Bank's baseline assumption.
"Potentially, it could be worse than that.
"We find it hard to believe - with lower immigration, prices where they were so high in the first place and with households suffering from unemployment - we'll get the same buoyancy in the housing market," he said.
At a 9-10 per cent drop, households would be "generally OK in terms of net equity... Most households have got 20 per cent equity or more in their houses."
"It would need a much bigger fall in house prices to leave households really stretched. Probably the bigger problem is, can they service the loans? Have they got the income? That's where banks have to help them out."
On the Covid-19 recovery, Mr Bascand said a large challenge was New Zealand's reliance on trading with nations battling the virus.
"We're dependent on trade with China, with Europe, with the states. If we can open up with Australia and potentially some others, that'll be wonderful, but we think we've still got some months ahead of economic pain, but not as much as it might have been."
Mr Bascand said it was encouraging that domestic spending was starting again in New Zealand but he would not "crow victory yet".
"I think there's still an area of caution out there. Businesses and households will not be spending freely for sometime. There's a degree to which we need a few more months to see how things pick up before we should be optimistic about a recovery," he said.
"Once you get firms failing and unemployment starting to roll then it really does have a bit of a downward spiral for a while. We too were looking at unemployment of around nine per cent or more. I think we'll just have to watch the data and see how things unfold."
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