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Despite New Zealand house prices recently reaching all-time highs, values are actually still some 8% down, after inflation, on those seen during the last housing boom in 2007, according to research from First NZ Capital.

Analyst Chris Green says that in recent times, underpinning the rise in national house prices has been strong gains made in both the Auckland and Canterbury regions. In particular, the latest REINZ figures for the month of February showed annual increases in the Auckland and Canterbury regions of 11.6% year on year and 12.3% year on year, respectively.

"In real terms (deflating nominal prices by the Consumer Price Index), we estimate that annual house prices have been recording positive increases since the December 2011 quarter, and for the December 2012 quarter recorded a real increase of 5.7%.

"However, despite this recent run of annual increases, national house prices in real terms are estimated to be around 8% below their September 2007 peak levels," Green says.

First NZ believes, however, that looking forward, it expects the recent acceleration in national house prices to peak around the 8.5% level, "dominated by robust price rises in the Auckland and Canterbury regions".

"Looking further ahead over the 2014 year, we expect nominal house price growth to ease back by the end of next year to around the 5.5-6.0% year-on-year level," Green says.

"In broad terms this would represent real annual house price inflation slightly above its long-term average of 2.5% year-on-year, together with a forecast annual inflation rate of 2.0-2.5% year-on-year."

Green says that underpinning the expectation of further gains in house prices is a backdrop of a moderate NZ economic recovery, a rise in real incomes, the boost to residential investment from the Canterbury earthquake rebuild, a modest recovery in net migration flows,  together with the maintenance of "supportive" interest rate settings.

"However, somewhat offsetting these supportive factors will be the prospect of relatively subdued domestic credit growth, together with continued balance sheet consolidation by households," Green says.

"Moreover, the key policy uncertainty when attempting to forecast domestic house prices remains the potential introduction by the RBNZ of macro-prudential policy tools. While these tools are currently in the consultation phase, they could begin to be deployed as early as the second half of this year."

First NZ believes the most likely macro-prudential tool to be used by the RBNZ to dampen any additional “overheating” in the housing market would be restrictions on high loan-to-value residential mortgage lending, followed by the central bank looking to adjust sectoral capital requirements to housing lending.

"In terms of likely triggers for RBNZ to implement these new tools, the bank has noted that it is closely watching the relationship between the growth in credit and GDP. If aggregate credit growth continues to remain around its current growth rate of 4-5% then we believe the RBNZ will remain vigilant, but be unlikely to act.

"However, if credit growth accelerates to around the 8-10% region and/or national house price growth move in excess of 10% year-on-year, the likelihood of macro-prudential policy tools being deployed would significantly increase. Relative to our house price forecasts, such a scenario will likely entail a higher peak in house prices, followed a more pronounced decline, as the macro-prudential tools were employed."

Green says on the basis of the long-term trend, real house prices, which were around 35% overvalued at their peak in September quarter 2007, were now estimated to have moved back to being around 10% overvalued.

"Despite house prices remaining overvalued, our housing affordability index, which takes into account interest rates as well as incomes, has shown a significant improvement since its peak in September 2007 on the back of the sharp decline in mortgage interest rates."