The Governor of the Reserve Bank says the only drivers of house price inflation left are "the fear of missing out, the speculative behaviour, fads, fashion and cycles".
Adrian Orr says there's nothing fundamental left in the economy pushing them up, and expects them to "come to a grinding halt and go sideways for some time", if not fall.
"All of those drivers have come to a halt," he told The AM Show on Thursday.
Last year, there were early predictions the pandemic would crash the already-inflated market - but the opposite happened, cheap credit - partly thanks to the Reserve Bank's record-low interest rate - allowing investors to borrow and spend.
The average price according to Quotable Value has gone up 37 percent since Labour came to power in 2017, most of that in the 12 months to April - which began with the lockdown and ended with the mean price over $900,000.
The median price according to the Real Estate Institute of New Zealand is now just over $800,000, having doubled in the past seven years.
"The fear of missing out, the speculative behaviour, fads, fashion and cycles - all of those things drive human behaviour," said Orr. "That sits a bit behind what we've seen over the last 12 months. Without doubt, just as they spiked above these fundamental drivers, they could also fall.
"We can only talk about what we see over the medium-term as a sustainable level, and we're saying there's no reason for the growth to continue as it has."
Auckland in February was ranked as one of the least affordable cities in the world, and perhaps the fastest-deteriorating when compared to local incomes. Prices in Auckland about $140,000 in 2020, to 10 times the city's median household income.
So what's changed?
"You've got increased tax for housing investors, you've got increased lending restrictions imposed by ourselves, you've got slowed population growth and you've got a big supply of housing coming on," said Orr.
The Government in March announced plans to strip landlords' ability to offset interest costs to reduce their tax liability, bringing them into line with owner-occupiers. When the UK did something similar a few years ago, rampant house price inflation slowed (at least until the COVID-19 crisis).
The Reserve Bank has also introduced lending restrictions. Only a small fraction of banks' lending can now go to investors with less than a 40 percent deposit.
Population growth has obviously slowed thanks to the border closure, with returning Kiwis and natural growth pushing it up 0.65 percent in the year to March 31, down from 2.37 percent growth the year before.
And the current housing boom, is the biggest since the early 1970s, though smaller on a per capita basis.
All-up, Orr says this should stop prices becoming more unaffordable than they already are - and that's a "very good thing".
"You want prices to be sustainable - if prices are above that, that creates economic risk for households and for the country as a whole. You end up with excess debt, you end up with homeowners who can't afford to pay for those homes in good times and bad, and you can't let first-home buyers into the market. It's not sustainable."
But what about interest rates? A number of economists have said until they go up, prices will keep rising.
Orr doesn't see the Reserve Bank upping the official cash rate until mid-next year at the earliest. But when it does, that's also a good thing - because it means the economy is recovering. For borrowers with huge debts though, not so much.
"The big hammer in the pocket is the level of interest rates, but we use that not to target house prices - we use that to keep consumer inflation low and people in jobs. But homeowners and wannabe buyers need to be thinking about what interest rate they can sustain on average through time, not just what the current interest rate is.
"As we all know, globally interest rates are at record lows... that's not sustainable. As the economy recovers ... as things turn to normal, then interest rates will also normalise at some point."