A report prepared by business researcher Infometrics is predicting house prices will fall 4.1 per cent by next June, affected by tax changes, cautious households, and the prospect of mortgage rate rises.

The report prepared for QBE LMI, which provides lenders' mortgage insurance, said house price growth was forecast to lift to 10 per cent a year by mid-2013.

That would put house prices 11 per cent above their current level, but after adjusting for inflation real property values were expected to be 1.1 per cent below their June 2010 level, the report said.

It was estimated that changes announced by the Government to the tax treatment of property would reduce house prices by 13 per cent during the next one to two years, compared to what house prices would have done without the changes.

That shift had led to a much less upbeat outlook for the housing market than that presented in the previous report a year ago.

The latest report, published today, said uncertainty about potential policy changes earlier this year had taken the momentum out of the housing market, leaving the market sensitive to other negative factors.

The prospect of considerable rises in mortgage rates during the next two years was weighing on purchasing decisions, particularly in more expensive urban areas, the report said.

With real house prices about 20 per cent above their long term trend, property still appeared to be overvalued, limiting strength in sales activity and house price growth in the near term.

The range of factors that could cause house prices to fall was offset by a lack of new house building during the past two years.

"Although New Zealand's population growth has been relatively strong, building activity has fallen away as result of the economic downturn, and continues to be constrained by a lack of funding for developers," the report said.

As economic recovery continued during 2011 and 2012, the undersupply of new building was expected to put a floor under house prices. That would prevent more significant declines and result in accelerating house price growth in 2012-13.

QBE LMI chief executive Ian Graham said the forecast drop in house prices, combined with employment growth and an expected rise in household income would improve overall housing affordability until late 2011.

That would be particularly attractive for first home buyers, and anyone buying during the next 18 months was likely to see substantial housing price growth.

- NZPA

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