Pick-up in housing market will not last: Westpac

House sales, adjusted for seasonal effects, have jumped 'from rock-bottom to roughly average'. Photo / Paul Estcourt

The pick-up in the housing market is unsustainable, Westpac warns.

The bank's economists expect rising unemployment and higher long-term mortgage rates to prove stronger than the factors which have seen signs of life returning to the market.

"We expect a return to low sales volumes and falling prices in the second half of 2009," Westpac research economist Dominick Stephens said.

The bank is forecasting a further 5 per cent price decline over the next 18 months, with risks on either side of that mostly determined by how interest rates evolve.

House sales, adjusted for seasonal effects, had jumped 74 per cent in five months, Stephens said, "from rock-bottom to roughly average", and the average number of days it took to sell a house had fallen to 2007 levels.

Although reliable, like-for-like price data for 2009 was not yet available, when houses were selling at this clip prices were likely to be rising, he said.

The strongest factor behind the pick-up had been the fall in mortgage rates in response to the Reserve Bank slashing the official cash rate since mid last year.

By February banks were offering two-year mortgage rates 3.6 percentage points lower than they had been a year earlier, a decline in the cost of finance of nearly 40 per cent.

The market had also been supported by a rise in net migration as fewer New Zealanders left for Australia. Combined with very weak activity in the residential building sector, that raised the prospect of a housing shortage.

And the cancellation of planned tax cuts would maintain the value of property as a tax shelter, Stephens said.

However, longer-term mortgage rates have risen sharply since March, by a full percentage point at the five-year term.

"Lower mortgage rates sparked the market revival and higher rates will extinguish it," Stephens said.

Short-term rates might fall, but only temporarily. The Reserve Bank was close to the end of its easing cycle.

Longer-term rates were more likely to rise as they had internationally as deflation fears subsided, he said.

Also, unemployment is forecast to rise further next year, creating more uncertainty for potential buyers and more forced sales. The Treasury forecasts the loss of 100,000 jobs over the next two years.

Stephens said the state of the labour market - not only mounting unemployment but low income growth - was a big negative for the housing market.

Westpac's 5 per cent forecast decline in house prices is less gloomy than some other forecasters. The Treasury, for example, expects another 12 per cent drop over the next two years.

Stephens said the more pessimistic forecasters seemed to be influenced by the fact that, even after the past year's drop, the ratio of house prices to incomes was still much higher than it was in the 1990s.

But it should be higher, he said, given changes since then in taxes, interest rates and inflation which had made property ownership more attractive.