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The Westpac team, led by Dominick Stephens, believe the current boom "has already passed its peak", amid record-low rates, a period with no LVR restrictions, and the rush to get ahead of new restrictions this year.
"We expect the monthly pace of price increases will trend down from here. This gradual slowdown in the market will see house prices rise at a slower 7.5% pace in 2022, and zero in 2023. And eventually, we expect house prices to fall," the economics team said.
The bank is pencilling in a 4% drop in house price inflation over 2024 and 2025.
Rising mortgage rates will be a key factor in driving the market down, according to the report.
A number of factors will force rates higher, Westpac said.
Wholesale markets have already begun to price in future OCR hikes, the RBNZ quantitative easing programme and LSAP will come to an end, and the Reserve Bank's new capital rules will force banks to push up rates, the economists added.
Westpac believes borrowers could be hit with higher mortgage rates by the end of the year.
"We expect that the longest-term fixed mortgage rates, such as five-year fixed, will start increasing quite soon. Two-year fixed mortgage rates are expected to start rising late this year or early next," the team said.
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