Barfoot agent Steve Koerber tweeted on the Spencer St sale, calling it an "auction frenzy".
Afterwards, he said the bidders had missed out at other auctions so were determined to buy this place.
But the price is not a record for a state house.
This month, the Herald reported the sale of a large unmodified ex-state house at 10 Puna St, Orakei, for $1.45 million, 45 per cent above its valuation.
Barfoot and Thompson listing agent Kathy Bower advertised the Spencer St house as an original two-bedroom place on an elevated, sunny freehold site overlooking the valley to the Wharua reserve.
"There were 51 people registered as potential buyers, and the most I've had before was 16," she said.
"This property is ready and waiting for you to refurbish, extend or whatever you choose to do - maybe build your dream home," he ad said.
"Close to all the amenities that Newmarket, Remuera and Parnell have to offer and for schooling it is in the double grammar school zone, Remuera Intermediate and Victoria Avenue Primary School zone."
Housing NZ has a policy of selling expensive houses on big sections to obtain money it can then invest in other areas.
For example, in Christchurch it wants to start a series of small redevelopments for 200 to 350 new homes being built over the next 18 months.
The department's general manager of assets development, Sean Bignell, said this would assist in replenishing the depleted state stock, help meet future housing demand and make better use of existing Housing New Zealand properties.
Meanwhile, finance expert Roger Kerr, of Asia-Pacific Risk Management, says home buyers and owners with mortgages should fix at least half the loan for two to three years now.
"If you get caught up in the herd when everyone's fixing, then rates go up," he said.
"Anyone fixing in the last two years has made the wrong decision."
If they delayed, they risked paying a higher price for their borrowings later.
"It's becoming a bit of a mortgage war which is a worry because that's how we got into the poop, with too much debt with the banks lending on a rising property market ," Mr Kerr said, referring back to 2006/07.
About 75 per cent of mortgage holders are on floating rates, leaving them exposed when they rise, he said.
Banks have been lowering their mortgage rates lately and KiwiBank was beating its rivals by offering a special one-year rate at 4.99 per cent. ASB is offering a one-year mortgage at 5.25 per cent and two years at 5.55 per cent.
On the flip side of the equation, depositors or investors have not been enjoying such great returns, which as a result of the extremely low interest rates have sunk.
Mr Kerr said people seeking higher returns were likely to look at avenues such as the NZX debt market. where they could invest with large businesses, such as the Warehouse, Genesis and Trust Power.
