House prices have fallen below a fair price that investors should be willing to pay - the first time this has happened since late 2006 - says the Westpac Bank.
Westpac economist Doug Steel told an Auckland regional job summit yesterday that house prices were now "around fair value" based on rents, interest rates and other costs.
"The negative sentiment towards housing is overblown," he said.
"That's not to say everyone should leap into the housing market. Our view for house prices is that they will drop by 5 per cent in 2009 and stay flat in 2010, but I think that is more positive than many."
House prices had fallen 8 per cent since their peak in late 2007, so they had already lost more than half of their likely total drop in value.
The Reserve Bank is more pessimistic, forecasting a 20 per cent plunge from the peak to a bottom at the end of next year.
Demographia director Hugh Pavletich said Westpac was ignoring the "underlying structural value" of New Zealand houses, which had to be related to local incomes.
"I strongly disagree with their reasoning," he said.
But Mr Steel said incomes were only one factor affecting house prices.
"Other factors are also important. Interest rates are one of them, and right now, with interest rates so low, it's got to make the [house-buying] equation stack up a little bit better," he said.
On Westpac's calculations, based on rents averaging $11,400 a year ($219 a week) and a five-year mortgage rate of 6.75 per cent, an investor on the top tax rate should be willing to pay $332,000 for the average house.
The Real Estate Institute said the median price of houses sold in February was $330,000.
Westpac says the rolling average of sales in the past three months was $325,000, noticeably under the "fair value".
The bank assumes that the Government will go ahead with its election promise to cut the top tax rate on incomes over $70,000 a year from 39 per cent now to 38 per cent next week and 37 per cent from April next year.
The fair value index already assumes a tax rate of 37 per cent. It also assumes investors will factor in long-term capital gains of 6 per cent a year, based on expected inflation of about 2.7 per cent and a mean real capital gain from 1971 to 2006 of 3.3 per cent a year.
"In the next year or two many might not be able to get that, so at least in the first year or two it doesn't stack up," Mr Steel conceded. "But in the longer term that short-term myopia dissipates."
Falling interest rates have pushed the investor value up again, so it is now higher than actual median house prices.
But Mr Pavletich said interest rates were unstable and would-be investors should focus on the "structural value" of houses, which had to be based on incomes.
"We should be at or below three times average household earnings," he said.
US house prices average 3.2 times household incomes.
"With Auckland at 6.4 times average household earnings ... quite clearly our house prices are grossly over-inflated."