Auckland's house price surge has prompted a warning that over-valuations are creating a bubble that will burst and cause a painful property recession.

Barfoot and Thompson's November figures, out yesterday, showed a 23-month price high in the city of $550,217 although the number of sales was fairly low.

Institute of Economic Research principal economist Shamubeel Eaqub said the trend could have far-reaching and damaging effects.

"House prices are showing renewed over-valuation," he said. "This will intensify as interest rates rise. A correction in the housing market is necessary to reduce the economy's vulnerability to house price movements. The sooner there is a change, the less the likelihood of a larger and more painful recession further down the track."

Prices were now near the previous peak, suggesting valuations were also becoming very stretched.

"While prices are rising, sales volumes are slowing after adjusting for seasonal patterns," he said.

Barfoot managing director Peter Thompson said prices were up in the last three consecutive months. Now, all the losses suffered in the last two years had been recovered, he said.

Housing had returned to being viewed as a sound, medium to long-term investment option, he said.

Barfoots sold 862 properties in November, down 1 per cent on October but 57.8 per cent up on a year earlier.

Eaqub said Barfoots was selling more than 1000 properties a month in 2006, so the latest figures were still fairly depressed.

Real Estate Institute figures due next week could also show big prices but low sales numbers.

Statistics NZ this week reported a big rise in the number of consents for new houses which economists said could result in about 16,000 houses being built annually, up from the current 12,000 houses.

The largest estate agency, Harcourts, said the usual spring surge in new listings did not happen, . But prices were up in some areas.

Harcourts chief executive Bryan Thomson said average prices in the northern region, which includes Auckland, rose from $443,000 in October last year to $509,000 in October this year.

Eaqub said next year's housing outlook was clouded by expected interest rate rises and lower net migration figures which could have a dampening effect.

PRICE SURGE

2002 - $367,036
2003 - $414,742
2004 - $439,215
2005 - $476,916
2006 - $507,470
2007 - $546,364
2008 - $500,840
2009 - $550,217

Source: November sale averages, Barfoot and Thompson