New Zealand house prices are forecast to continue to rise this year, according to an economist.
Westpac chief economist Dominick Stephens believes house prices will increase by a peak of 10 percent in the middle of 2020.
"The market has proved slightly stronger than we anticipated. We now expect the current upturn to culminate at a rate of 10 percent annual house price inflation," he writes in the February issue of NZ Home Truths.
Stephens says the market's behaviour in the past year has shown how financial factors can trump supply and demand in the housing market.
New Zealand's construction activity has increased while net migration has steadily declined - but house prices have "shot higher".
This has been due to a reduction in interest rates combined with the cancellation of plans to introduce a capital gains tax, the report says.
It was this experience that led Westpac to believe reforming the tax system was the only way to "solve" New Zealand's housing affordability crisis, "but it won't work so long as the tax system continues to favour property ownership".
"Policies designed to encourage building small houses, such as KiwiBuild, are a positive step for society at large. But those small houses will tend to be bought up by landlords," Stephens writes.
"Meanwhile first homebuyers will remain out in the cold paying tax on their incomes and savings as they work towards raising a deposit."
He adds house prices have increased at a more even rate across the country, but Auckland is now among the fast-rising regions.