The Government will pour close to $4 billion into a scheme to accelerate the pace of new house builds, which is expected to help see "tens of thousands" of new properties built.
The Government's new housing policies could hold "significant downside risk for house prices and economic activity more generally", Westpac senior economist Satish Ranchhod says.
"With a likely slowdown in house prices, the economy's recovery is likely to be even more gradual. That will make it even harder to generate asustained lift in inflation."
On that basis, the Westpac economics team would be reviewing its economic forecasts over the next few days, he said.
"Today's announcements – particularly the changes to interest rate deductibility – will significantly reduce the financial incentives to invest in housing.
"That will have a chilling effect on investor demand."
Westpac says it expects the new policy could mean prices eventually settle down 10 per cent.
But there could be "much greater effects in the short term as some investors exit the market".
Given that was likely to be a significant drag on house price growth, "we expect this to reverberate through economic activity more generally", Ranchhod said.
"The housing market plays a key role in shaping economic conditions more generally. In particular, growth in house prices tends to be associated with increases in household spending and residential construction.
"We'll review our economic forecasts in light of these changes over the next few days."
These changes would likely mean OCR hikes by the Reserve Bank were off the table for the foreseeable future.
ANZ chief economist Sharon Zollner said the moves - most significantly the removal of investors' ability not to deduct interest costs - "should take the wind of the sails of the housing market".
"Today's announcements increase the risk that the house price moderation is sharper," she said.
Satish Ranchhod, senior economist at Westpac Bank. Photo / File
"But importantly, it increases the risk that house prices actually fall – it's very difficult for policy makers to engineer a soft landing."
There would be a mix of reactions to the policies, which made judging the final net effect difficult, she said.
"But we know this is a negative."
There was now a lot on the policy front that was coming to a head, while affordability and credit constraints lifted and supply continued to ramp up, she said.
On that basis, "house price falls are hardly unthinkable from such a stratospheric starting point".
In terms of the broader economic impact from a broader economy perspective, slowing housing-induced momentum shouldn't be too concerning as long as the pipeline of planned activity was not materially dented and the progress continued to ending the pandemic and opening borders.
"Rising export prices are also providing a boost, " Zollner said.
"But the economy is still pretty vulnerable this year, and the state of the housing market does have a big impact on the New Zealand economy."
However, the counterargument to that was that "if house prices were allowed to rise unchecked still further from here, the vulnerability of the economy would worsen, not improve, as the risks of a boom-bust cycle rose".
