A leading economist has backed Herald business columnist and Milford Asset Management executive director Brian Gaynor's predictions of a house price adjustment in the next few years.
Dominick Stephens, Westpac's chief economist, said he shared the fund manager's concerns about the sector after Gaynor said "10, 15, 20 or even 25 per cent" falls were possible and could be devastating.
But Stephens is far less bearish than Gaynor, saying Westpac's forecasts indicate a possible 5 per cent adjustment by 2018.
"Our forecast has been for declines of 2 per cent per annum in 2017 and 3 per cent in 2018 so 5 per cent overall. But there's a wide range of possibilities and a sharper decline is certainly a possibility.
"I trend to broadly agree with him due to two things: first, there's lots of momentum right now and we're picking high single digit house price inflation for 2015 and secondly, the pace of increase and level of house prices can't be sustained.
"So for some time, we have been forecasting declining house prices later this decade and we have been for many years. The basis we have for those predictions is interest rates. For now, they're falling and we expect house price appreciation.
"But later in the decade, I would expect them to be higher than they are now so we would expect house prices to decrease. If the Australian economy improves, that will have an effect on net migration and I don't think people understand how much the Canterbury rebuild has contributed to the economic upturn through the middle of this decade and it's set to peak in 2016," Stephens warned.
"There's a bit of a myth that house prices tend to go sideways and that's just not true. They tend to fall all at once so in 2008, we had a 10 per cent decline," he said.
Gaynor told interest.co.nz's Gareth Vaughan that a big correction could be in store.
"Property's hard to pick. There's no question about it there's massive momentum to the property market. The way that the property market normally runs out of steam is a big increase in supply. The supply doesn't look like it's coming this year. So I can see housing going even higher.
"But it is a major medium term concern because there's no question in my mind at some stage, and I don't know when, the property market will come back. And it will come back 10, 15, 20 or even 25% and that will have a really devastating impact upon the New Zealand economy because of the high level of debt. Will it be this year? Probably not, but it could be. Will it be next year? I'm not sure. It could be two or three years time but it will happen at some stage.
"Asset prices don't keep on going up year after year although most New Zealand investors believe that they do."
More house building and Australian economic improvements could tip the balance.
"It's supply. It's a big increase in supply and a big upturn in the Australian economy. When all of a sudden Australia does better you get people leaving, going to Australia and you get less New Zealanders coming back here, and at the same time there's a big increase in supply. Supply is normally the major thing that kills it and we're not getting the supply this year, and particularly in Auckland we're not getting anything like it.
"There's talk about the amount of houses we need to build but we're not building them.
A lot of the companies are very cautious. They're finding it difficult to make money building houses because although prices are high the cost of materials and the cost of labour, (is also high).
"If you look at the Trade Me latest job ads there's a huge amount of ads for people in the construction industry and property industry. It's a sign that the big companies just can't find the skilled people to work on these projects, and when they do get them they're having to pay them very high wages.