Photo: RNZ
House prices are likely to stay flat through this year but increase 7 percent over 2025, BNZ says.
In an update on Tuesday, chief economist Mike Jones said demand and housing activity would pick up from here as interest rates fell.
But at first, that demand would just soak up some of the increased number of houses for sale and avoid further price falls.
Real Estate Institute data shows there were almost a third more properties listed for sale in July than the same time a year earlier.
But Jones said towards the end of the year, there would be a "modest upswing" in prices.
Although the labour market might deteriorate for another year or so, he said, sharp falls in mortgage rates would probably boost the housing market as other economic activity improved.
"Anecdotal evidence points to a lift in prospective buyer inquiry and confidence. No doubt some of this reflects borrowing capacity estimates getting a small uplift and people being able to draw a line under prior concerns that interest rates may yet go higher."
Jones said the switch from flat house prices to 7 percent per year growth might seem like a leap. "But the context is that by the end of this year we think we will have had two years of basically flat house prices. All we're really talking about is a return to some sort of average, which tends to be 6 or 7 percent [per year] over the long run. You're not getting house prices back to anywhere near the peaks we saw almost three years ago. The context is still one of a slow and low sort of housing market."
He said affordability had improved a little in recent years as prices fell, household incomes increased and now interest rates were dropping.
He said it would normally take about six months for changes in mortgage rates to feed through to house prices.
BNZ expects floating home loan rates to be in the 6 percent range by mid next year, from about 8 percent now.
Jones said the wholesale market had already factored in an official cash rate of about 3 percent by the end of next year.
That meant it was reasonable to assume that declines in retail interest rates would not be as rapid in future as the falls experienced over the past month-and-a-half, he said.
"Shorter-dated mortgage rates - floating out to 18 months - which, by their nature incorporate less of the expected easing cycle, have more room to fall than longer-term mortgage rates.
"These considerations are important inputs into our broad interest rate view. Altogether it implies, at a high-level, a two-year fixed mortgage rate closer to 5 percent by mid-2025 with a five-year fixed rate a little higher than that around 5.4 percent.
"If correct, this would amount to a steepening of the mortgage curve and a return to the 'normal' situation of an upward-sloping curve - longer-term rates sitting above shorter-term rates."