Weak demand for property prompted falls in residential house prices over 2010, and tax measures preventing property investors offsetting their losses against income and other taxes saw real estate demand fall considerably, according to JP Morgan economist Helen Kevans.
Commenting in the wake of the December Real Estate Institute (REINZ) report - which found both sales and prices had fallen - Kevans said, "Slow sales have kept inventory levels elevated, meaning that the backlog of unsold property sitting on the market will depress house prices further in coming quarters."
"Indeed, no dramatic revival is anticipated this year. The fundamentals for the housing market are soft, as households continue to shy away from taking on additional debt," she said.
Kevans also highlighted Budget changes to the tax treatment of investment property as a factor in the slowing market.
"Property sales fell from 5,138 in November to 4,397 in December, to be well below the 5,206 sales recorded in May when the tax changes were introduced."
ASB's Chris Tennent-Brown was equally pessimistic about the state of the property market.
He said that despite housing activity improving in November and December from an extremely weak October, "the market remains frail, with turnover, prices, and days to sell all weaker than year-ago levels."
The amount of unsold property was also highlighted by Tennent-Brown as a drag on the market.
"The amount of inventory on the market remains quite high relative to turnover. Given the level of inventory, and the long average length of time taken to sell property, the market continues to remain tipped in favour of buyers," he said.
"We continue to expect softness in prices over the months ahead, with prices remaining down on year-ago levels, and around 5% off the 2007 peak."
Tennent-Brown cited a number of fundamental factors that remain unsupportive for the housing market, including low migration and affordability issues.
Also, while interest rates remain low, they are "significantly" higher than early 2009 and are expected to rise over the coming year.
Westpac was slightly more upbeat on the REINZ data, saying the figures provided evidence the market has stabilised, albeit at a lower level of activity.
"House sales were about flat in seasonably adjusted terms, following a 15% jump in November that included a rebound in activity in the Canterbury region following the September earthquake. Sales are still down 11% on last December but it seems increasingly likely now that the level of sales has bottomed out."