Don't buy - house prices set to fall, banks warn

First-home buyers are being warned to stay out of the housing market as property prices are set to fall.

Bank of New Zealand chief economist Tony Alexander has predicted a 10 per cent drop in the next three years and Westpac economist Donna Purdue has predicted a 5 per cent drop this year.

Keen buyers should cool their heels and continue paying rent to take advantage of the market, Mr Alexander suggested.

House prices rose 55 per cent in the past three years, but rents were up by less than 10 per cent.

"In the previous housing boom, from 1993-97, both rents and house prices broadly rose together," he said. "This time only house prices have moved strongly."

Mr Alexander cited tumbling net migration, which had gone from a record 12-month gain of 43,000 people in May 2003 to just 12,800 in January.

He also said sales figures from Auckland's Barfoot & Thompson showed the average sale price fell from $443,000 in January to $429,000 last month, if one large sale was excluded.

The capacity for Auckland house prices to fall was much less than that of other regions, particularly Nelson, the Hawkes Bay and Taranaki, where the price drops would be steepest, he said.

"But young Auckland home buyers looking at gearing themselves up to the hilt should wait," he said.

Donna Purdue said Westpac forecast a 5 per cent drop in house prices this year.

But competitive mortgage rates at the end of last year had given the market a second wind, delaying the predicted slow-down, she said.

Next year, prices would continue falling because of higher interest rates, low migration and increased supply of housing from record construction.

ANZ National Bank chief economist John McDermott was more guarded. "The market is defying gravity and it's had a good run but it can't keep being repeated. To say everybody should rent is overdoing it. People buy houses for reasons other than simply as an investment."

Bryan Thomson, chief executive of the 170-office Harcourts, hit back at criticism of the housing market, and particularly the Reserve Bank's attempts to cool it.

"Moves by the bank to slow the market by lifting interest rates appear to be having little effect apart from the impact on our exporters," he said. "The residential property market is driven by several factors, including job security and income."

Listings in Harcourts' northern region, which includes Auckland, fell for the second month in a row last month. But prices were up from an average $328,000 in February last year to $398,000 last month.

Auckland investment adviser David McEwen last month warned clients about residential property, saying signals such as overheated prices and low rental yields were cause for concern.