Rising rental prices and a desire to downsize has lead to an increase in value for Tauranga's smaller homes, industry experts say.

The latest Trade Me Property Price Index shows the average asking price for one and two-bedroom homes in Tauranga increased 11.9 per cent in the last year, rising from $462,900 in October 2016 to $518,000 in October 2017.

Prices for small homes in Western Bay of Plenty rose 11.6 per cent, from $485,950 in October 2016 to $542,500 last month.

Read more: Number of house sales drop across Bay of Plenty
Western Bay of Plenty experiences massive drop in sales

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The average asking price of three- or four-bedroom homes in Tauranga rose 7.3 per cent to $689,400 in the same timeframe. The Western Bay increased 5.9 per cent to $683,700.

Western Bay couple Moonyean Kaur and her husband Ravinder Singh bought their first home in Te Puke after not being able to find anything appropriate in Papamoa, where they had been living.

She said they had wanted to own their own home for a while but, with rising house prices, thought it would be "just a dream".

However, with a successful business behind them, they were able to get approval for a home loan and found a two-bedroom home and cabin for their family of five in Te Puke.

She said they had looked at three other properties that were bigger in size but not suitable.

"We actually tried out hardest to stay in Papamoa ... the prices were just too crazy," he said.

Kaur did not want to reveal how much the couple had paid for their home but said it was substantially less than the average price for last October.

She said while relocating from Papamoa to Te Puke was hard, they loved the community they were now part of and were happy to be where they were.

Tauranga Harcourts general manager Nigel Martin said there were more smaller-sized homes being built because of a downsize in land development.

"There are also different requirements of how much of the land can be built on and, if the land is small, that brings down the size of the house," he said.

Martin said building costs had also increased in the last few years, affecting the size of homes being built.

He said older Auckland residents were moving to the Bay to downsize. "The kids have left home and they moved here to downsize their home as well as their mortgage."

Simon Anderson, chief executive of Realty Services which operates Eves and Bayleys, said he was not surprised by the trend as first home buyers were now realising they could not move into a four-bedroom home and were buying smaller.

"They're actually positioning themselves better within the market and we're seeing them purchasing those sorts of properties to get on the property ladder, which is really quite encouraging for the market - that they're making those good decisions."

He said it was "absolutely a positive trend".

"They're the sort of people you want on the property ladder, so they can have a home for a start and then move to the next stage as time goes on, as they make their debt reductions and more savings and can move to a larger home when the family requires."

Anderson said supply and demand caused value changes and the more people looking, the higher the value was going to go. "And that's just a fact of the market."

First National Mount Maunganui, Tauranga and Omokoroa owner Anton Jones said investment buyers contributed to an increase in the asking price for smaller homes at the beginning of last year.

"They were a good property investment and were very sought after."

Jones said the increase in rental prices had also pushed buyers towards wanting to buy instead of rent.

"It is better value for money to buy if you can afford the deposit," he said. "It is always better to own than rent."

He said affordability also contributed to an increase in smaller house prices.

Rochelle Carter from Ray White Te Puke said homes under $400,000 in Te Puke, Pukehina and surrounding areas were attracting interest from multiple prospective buyers as first-home buyers could afford to buy in that price bracket.

Carter believed a stock shortage had pushed prices up. "Its a supply and demand situation," she said. "Properties that are priced well to the market are selling and achieving good interest."