A major bank is picking house prices to start declining as interest rates "get back to something more like normal", and tax changes aimed at evening the playing field between owner-occupiers and investors come into force.
But Westpac forecasts the declines won't come until 2023, and won't be anywhere near large enough to make up for the rapid price inflation of the last 18 months.
The Reserve Bank is widely expected to start hiking the official cash rate (OCR) on Wednesday in its next monetary policy statement, bringing it up from the record low 0.25 percent brought in ahead of the nationwide lockdown in March 2020.
"We're expecting the cash rate to be going up in the coming months," Westpac chief economist Michael Gordon told Newshub. "Regardless of what happens with the decision on Wednesday - there's been speculation that it might not just be a 25 basis-point move, it might be 50 - either way I think we'll be looking at a cash rate of 1 percent by the end of this year, and further increases after that as the Reserve Bank looks to back out of the stimulus it put in place last year and get back to something more like normal."
It's been more than seven years since the OCR went up. In that time, the median house price has doubled - about half of that increase coming since the OCR dropped from 1 to 0.25 percent in March 2020.
Gordon said the low OCR, designed to encourage borrowing and investment, has been the biggest factor in the rapid rise in house prices.
"A lot of the 30 percent rise in house prices we saw over the last year was really about those record-low mortgage rates… the shortage of housing was a factor, but that's not something that suddenly came on in the last year. It was very much about the low borrowing cost side of the equation.
We think it will work quite strongly in the other direction too."
Westpac's latest Economic Overview, released on Tuesday, forecasts price inflation will slow over the next year as the OCR creeps up towards 2 percent. By 2023, prices should start falling.
"Over the long-term, it depends on where interest rates end up… looking several years ahead, there's also factors going on," said Gordon, noting while the tax changes aimed at landlords haven't had an impact yet, it's likely they will as they're phased in over the next few years.
That's the most house prices will fall in a single year, according to Westpac, is about 4 percent. By 2025, they'll be stable or rising again.
But much of this depends on how New Zealand's reopening to the world goes over the next few years, particularly in light of the Delta variant and its ability to spread even amongst a vaccinated population.
"New Zealand's approach is still to go hard and go early, so we'd be looking at another period of lockdown" if it got loose here, he said.
"We kind of know what that looks like from a forecasting point of view. We also know that economies tend to bounce back quite readily once you come out of lockdown. The longer-term issue of how we deal with COVID is perhaps a more challenging one."
New Zealand's in a unique position having been largely without restrictions in the past year, while the rest of the world has been living with mask mandates, social distancing, and limits on gathering sizes - and the very real threat of infection with the virus.
"It's becoming clear now that Delta is contagious enough that you can't just vaccinate and reopen - there's got to be something else going on to manage the flow of cases," said Gordon.
"So we're probably going to be looking at some ongoing public health measures… that's really where the whole world is going to be converging on, except for most countries it's going to be reopening and less restrictions than they have right now; for us - because we don't really have any domestic restrictions, it will probably mean a bit more than we've been able to enjoy going without so far."
He expects the Government will deploy the same wage subsidy scheme should there be an outbreak of Delta here before everyone is vaccinated, saying it was "really effective in terms of minimising the damage" last year.
"It kept people attached to their jobs, and really avoided some of the really painful unemployment costs like we're seeing in the US, for example... yes, it's expensive and you don't want to be having to do it that often, but the Government's accounts are actually reasonably good shape at the moment. They've far outperformed on the tax take compared to what they were forecasting."