After a seven-year "famine" the economy will have its best performance since 2007 next year, with NZIER forecasting strong growth led by household spending.
But it may also be a year of rapidly rising interest rates, if the Reserve Bank's new speed limits on low deposit home loans do not work. The first "warning shot" may be a 50 basis point rate rise in March by the Reserve Bank, NZIER says, pushing mortgage rates towards 8 per cent by the end of the year. If the speed limits are effective, official interest rates could remain on hold till the end of next year.
NZIER also suggests the Auckland housing "shortage" is much smaller than earlier thought, at just 5000 homes, compared with Auckland Council estimates of up to 30,000.
"That looks way over the top," NZIER principal economist Shamubeel Eaqub said.
If the Housing Accord between the Government and the council delivers 39,000 homes and sections as proposed in the next three years, it would lead to an oversupply of 10,000 homes. That would come at the same time the Reserve Bank is trying to cool down home loan borrowing.
That was a "significant risk for house prices in Auckland", NZIER says and could drive vacancy rates up sharply.
After adjusting for inflation, real house prices in Auckland are up 15 per cent on levels in 2007, which appeared to reflect a feeding frenzy of investors rather than demand from a rising population.
Auckland house prices were now at "unprecedented levels" relative to history and international experience. "There is more borrowing and the risk from a potential fall in house prices is high", NZIER said.
In its latest Quarterly Predictions, the New Zealand Institute of Economic Research forecasts growth of 3 per cent next year, after a "seven-year famine".
Household spending would lead the growth charge next year, boosted by the Canterbury rebuild recovery and a rebound from last summer's drought.
The Canterbury rebuild alone would account for about a third of the 3 per cent annual growth next year.
"The amount of concrete being poured in Canterbury . . . is fantastic and about time. We are seeing traction and that's encouraging to see," Eaqub said.
In the post-recession period households had not borrowed a lot of money, as they had done last decade. But in the past nine months there had been a reversal from households paying down debt to taking on more debt.
"There is a sense of normalcy coming back in the way people (spend) and consume," he said.
There was a lot of pent-up demand for items such as cars and appliances in the past year. The underlying pace of the job market was also picking up.
Existing workers had been putting in more hours per week as the economy improved, but as those levels returned to normal levels, there would be a surge in new jobs, also supporting spending.