House prices overvalued by 10 per cent: Westpac

The housing market is 10 per cent overvalued on fundamentals, modelling by Westpac economists has found.

That is a greater degree of overvaluation than at any time in the past 20 years.

The bank said house prices on average were likely to fall 5 per cent next year because of slowing population growth, rising interest rates, increased construction and changed sentiment.

"Historically much of the correction to periods of overvaluation occurs via house prices remaining static and fundamentals catching up," Westpac chief economist Brendan O'Donovan said.

The economists have constructed a model reflecting long-term drivers of house prices such as growth in incomes and wealth, population growth, growth in the stock of housing and mortgage rates.

It also includes short-term factors which influence the cycle rather than the trend, such as migration, building consents, construction costs and "momentum" (the buy now before the price goes higher factor).

The model's output very closely tracks what has happened over the past 20 years.

Looking forward the modelling suggests that house price inflation peaked at the end of last year and will continue to abate this year.