The pick-up in the housing market is unlikely to last, Westpac economists are warning.
Chief economist Brendan O'Donovan and research economist Dominick Stephens predicted low sales volumes and gentle price declines in the second half of this year.
Prices would start falling again soon for the simple reason that longer term mortgage rates had risen sharply since March, the economists said today.
They forecast house prices to fall 5 per cent during the next 18 months, with variations from that mostly determined by interest rates.
"Lower mortgage rates sparked the market revival, and higher rates will extinguish it."
Mortgage rates were likely to continue weighing on the market for the next few years. Short term rates might fall, but only temporarily, while long term rates were more likely to rise.
Other reasons to doubt the longevity of the housing market pick-up included rising unemployment, and continuing tight credit conditions, the economists said.
The only positive factor was continuing strong net migration, which kept their predictions for price declines modest.
The Westpac economists said their forecast for house prices was less pessimistic than others.
The more pessimistic forecasters seemed influenced by the fact New Zealand's house price to income ratio was much higher than it was in the 1990s, the economists said.
But changes in taxes, interest rates, and inflation had made property ownership more attractive relative to the 1990s, while restricted land supply might also have pushed up prices.
Westpac's investor value model suggested house prices were about 8 per cent overvalued.
Indications of the improvement in the housing market so far this year included a 74 per cent rise in seasonally adjusted house sales in five months, from rock-bottom to roughly average.
Meanwhile, the number of days to sell a house had fallen back to 2007 levels, while the number of available listings in Auckland had started to fall.
The economists said they had no reliable price data for 2009 yet, but when houses were selling as quickly as they had been, chances were that prices were rising.