Prices to continue upwards for some time yet

The latest Westpac housing report update says the New Zealand housing market is currently displaying all the symptoms of a bull market.

"All indicators are typical of a market upturn and point to a significant price increase," the report says. "Conditions will favour rising prices for some time yet."

House sales have risen sharply over recent months and now stand at around their long-run average. Prices are now 8% higher than they were in January this year. Despite remaining 4% below the peak of November 2007, prices have risen 4.2% over the past three months, according to the Real Estate Institute of New Zealand (REINZ).

The bank is expecting the annual rate of house price inflation to reach double-digits by the middle of next year.

Improved economic confidence is no doubt playing a role in the up-beat housing market, but the main drivers have been low mortgage rates and strong population growth, combined with a lack of building activity which has created a shortage of new houses.

The building of new houses has been running at only 14,000 per year, while 25,000 houses are needed every year.

"History shows that when crowding occurs, higher house prices and strong growth in residential building activity are sure to follow," the report says.

However, these drivers are "necessarily temporary". Eventually, rising short-term interest rates and a pick-up in construction activity, will bring the bull run to an end.

Pending changes to taxation on property could also have a negative effect on house prices.

The negation of the market's short-term strength will result in another downturn, "possibly involving another brief period of house price decline or a longer period of house price stagnation," the report says.

Westpac is tentatively penciling in the next downturn-of-sorts towards the end of next year, although "the timing is extremely difficult to pick and depends mostly on when the Reserve Bank acts to raise the OCR".

Read the full report here