The housing market has a head of steam up, Westpac economists say, but they expect a downturn late next year.

Reserve Bank Governor Alan Bollard warned on Wednesday against a return to the kind of debt-fuelled, housing-led boom that preceded the recession, and said he would move to counter it if necessary.

He added that growth in mortgage lending was not now a problem.

But Westpac research economist Dominick Stephens said housing was displaying all the symptoms of a bull market.

The number of sales had risen sharply, the time it took to sell had shortened, and prices had risen 8 per cent since the start of the year and were only 4 per cent below their record high two years ago.

This reflected a shortage of new houses - caused by a strong population gain from net migration and a lack of building activity - as well as low mortgage rates.

But those factors were temporary, Mr Stephens said, and there was a risk of tax system changes which would be "seriously negative" for house prices.

About 14,000 new houses a year were being built, but 25,000 were needed to match population growth.

Mr Stephens said building would pick up in response, but it was constrained by the fact that finance for property development was extremely difficult and expensive to secure.

That could ease, but a return to the loose lending conditions of 2004 to 2007 was exceedingly unlikely.

Alternatively, the make-up of the construction industry could change.

"Large, well-capitalised corporations ... will be the most able to seize this profit opportunity. Small-scale builders, who are mostly cashflow positive, might go from building two houses a year to building three.

"But mid-sized developers who are highly leveraged may suffocate from lack of finance."

On the interest front, long-term rates had already gone up, but house prices had kept on rising as the market reacted more to low short-term rates.

That was worrying, Mr Stephens said, "because if low short-term rates are driving prices up, then the inevitable increase in those rates will eventually drive house prices down again".

Whether house prices are overvalued depends mainly on long-term mortgage and inflation rates.

Westpac economists' pick for those factors are mortgage rates of 8 to 8.5 per cent and inflation of 2.8 per cent.

If they are right, house prices are between 2 and 17 per cent above their long-term sustainable level.

But that depends on no changes to the tax system, which is under review.

Mr Stephens said a capital-gains tax or land tax would be "unambiguously and significantly negative for house prices, and probably positive for rates of home ownership".