House prices have further to fall, says Westpac in a report that predicts a long period of fairly subdued house sales.
Westpac expects house prices will fall 2% a year in 2010 and 2011.
A resurgence in the housing market in 2009 turned out to be a flash in the pan and this year has been slow for a market facing the reality of rising interest rates, impending tax changes and slowing population growth.
"We expect house sales will pick up briefly as property investors reorganise their affairs in light of the new tax reality. But beyond the next few months, we anticipate a long period of fairly subdued house sales.
"People are less inclined to upgrade their house, or get into property, when prices are flat or falling."
In the May budget the government signalled the removal of depreciation on buildings, and an increase in the goods and services tax (GST).
Westpac said the depreciation policy change was a "minnow."
"It will seriously harm cashflow for a few highly leveraged property investors but it will only slightly reduce the overall attractiveness of property investment by removing what was, in effect, an interest free loan," Westpac said.
Investors were required to pay back any depreciation claims upon sale, had the property not actually depreciated.
The increase in GST was positive for investment in residential housing because it drove up the price of building new houses and made housing a more preferred form of consumption as houses were exempt from GST.
"We estimate that house price inflation over the next few years will be about 10% less than it would have been if the tax system had remained unchanged," Westpac said.
Westpac believes rents will end up about 7% higher than they would have been had the tax system remained unchanged.
Higher rents and lower house prices would tend to increase the rate of home ownership, relative to what would have occurred in the absence of tax change.
Meanwhile, BNZ economists said a residential construction recovery may be wavering.
"New Zealand's construction sector might not be quite the GDP driver we thought it was going to be for this year," BNZ economists said.