The QBE LMI New Zealand residential property overview, prepared by Infometrics, says rising house prices will also be held by a shortage of new housing.
The report showed a strong lift in house sales, up 41% in the June quarter compared to a year earlier.
The strong recovery was largely attributed to the downward movement in mortgage rates since mid-2008, which had significantly improved affordability of property for both investors and first home buyers.
Residential property was also taking a shorter amount of time to sell. Across the country, median time on the market had dropped from 58 days in July last year to 41 days in June this year.
QBE LMI chief executive Ian Graham said housing affordability had improved on a national level and the level of demand among buyers had increased.
"With a lack of available finance for developers, a significant shortage of new housing is arising in New Zealand and is expected to continue into 2010."
The underlying demand for new houses was sitting at 21,000 a year and was strongly driven by an increase in net migration and a reduction in New Zealanders moving overseas.
That under-supply of new dwellings would contribute to an increase in property prices during the next three years, he said.
House prices in Otago-Southland peaked later than in most regions and by June last year were rising at 6.6% a year, the fastest rise in the country by some margin, the report said.
As a result of the delayed peak, the price fall during the June 2009 year was the largest in New Zealand with prices down 8.1% from a year earlier.
The largest price falls of 13% in the year were recorded in the Central Otago Lakes area, although the relatively small size of that area could result in volatility in the median house price.
Estimated population growth in the region climbed to a six-year high of 0.9% in the year to June, helped by a drop in the number of overseas departures.
Southland, particularly, appears to have benefited from that change with an estimated population growth of 0.7% higher than at any time since at least 1996-97.
The economic downturn had negatively affected population growth in Central Otago Lakes as more people headed overseas from the area and sent population growth down to a nine-year low.
Otago-Southland recorded the weakest sales growth in the country during the year to June with sales volumes down 20% on the previous year.
The result was unsurprising given the downturn in the region's housing market started later than for most of the rest of the country, Mr Graham said.
Sales growth in coastal Otago was in line with the national average but activity in Central Otago Lakes fell 20% and sales volumes in Southland were down 29%.
In the forecast for the region, QBE LMI said low mortgage rates would help property values in Otago-Southland to turn around in the next 12 months. House price growth was expected to recover to 14% a year by June next year.
"With property in parts of the region among the cheapest in New Zealand, investor demand is being boosted by the improvement in affordability that has occurred."
But price growth was likely to be slower in 2011 and 2012 as mortgage rates rose and limited the ability of buyers to pay higher prices for housing, the forecast said.
