Westpac warns on overvalued housing market

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New Zealand's housing market is displaying all the symptoms of a bull market, Westpac says.

Improved economic confidence was no doubt playing a role in the housing market's revival, the bank said.

While strong population growth combined with a lack of building activity was creating a shortage of new houses, low interest rates were also driving the market, Westpac said.

"If this market remains hot, houses could become overvalued again."

House prices are 8 per cent higher than in January, although they remain 4 per cent lower than the November 2007 peak, according to the Reinz Monthly House Price Index.

Prices have gone up 4.2 per cent over the past three months.

The market recovery is led by the main urban centres, particularly Auckland, which were also responsible for leading prices down in 2008.

According to Quotable Value, annual price gains in Wellington, Christchurch and Auckland have exceeded the national average gain. Market conditions will favour rising prices for some time, according to Westpac, which also said it expected the annual rate of house price inflation to go double-digit by the middle of 2010.

In 2010, Westpac expected interest rates to rise, and a strong increase in house building.

This could negate the market's short-term strength and possibly cause another brief period of housing price decline or a longer period of house price stagnation.

Westpac said it has the downturn pencilled in for late 2010, but the timing was extremely difficult to pick.

NZPA