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House prices are being picked to surge next year, underpinned by low mortgage interest rates and recent cancellation of capital gains tax plans.

Westpac chief economist Dominick Stephens said he expected nationwide house price inflation to lift from the present 2% to 7% in 2020.

"The New Zealand housing market has slowed substantially over the past two years.

"But the recent cancellation of capital gains tax combined with plunging mortgage rates will be game-changing," Mr Stephens said.

While he expected "moderate" price growth in Auckland, there would be more "rapid" increases elsewhere around the country.

Nationally, house price inflation was at 16% in 2016, but had since slowed to 2% now. Much of the slowdown had initially been concentrated in Auckland and Canterbury.

In 2017-18, many regional areas had experienced a boom in house prices, but that had since eased and the gains were smaller, including in Otago, the Bay of Plenty, Northland and Gisborne-Hawke's Bay.

Westpac's house price forecasts earlier this year had incorporated an assumption that some form of capital gains tax (CGT) would be introduced next year, which caused a period of house price decline.

"The threat of CGT was previously hanging like a Sword of Damocles over the market, impacting sentiment and prices here and now.

"Now that the threat has gone, there will be an immediate improvement in market sentiment and a `relief rally' in prices," Mr Stephens said.

The other big change has been the "very sharp drop" in mortgage rates over recent months; an almost 40 basis point drop in the average two-year fixed rate, which was now 60 points lower than a year ago, and five-year rates were now 120 basis points down on a year ago.

"Wholesale fixed interest rates have plunged following the Reserve Bank's recent change of tack towards lowering the official cash rate."

Mr Stephens said now net migration had slowed and construction activity lifted sharply, building activity was now roughly commensurate with population growth and shortages were neither getting better nor worse.

"This means physical supply and demand is not really influencing rents or prices one way or the other at present."

Later in the 2020s, he expects "flat or falling house prices" prompted by rising mortgage rates; the inverse of low rates underpinning higher prices.

Rising rates would also be due in part to the Reserve Bank's requirements for banks to hold more capital, which would push mortgage rates up, independent of the OCR. "This general rise in mortgage rates will push house prices down relative to rents in the mid-2020s," Mr Stephens said.