The aggressive rebound in Auckland and South Island house prices during March has prompted Westpac to almost double its 2016 house price inflation forecast from 6% to 11.5%.

In March, Auckland prices rose $70,000 to hit a record median $820,000, Central Otago Lakes rose more than 25% to $702,000 and Dunedin's total March sales of 277 houses was a more than eight-year high.

Following the release of the most recent Quotable Value and Real Estate Institute of New Zealand data, commentators are signalling an end to the effects of last year's Government investor tax changes and the Reserve Bank's loan to value ratio (LVR), meant to cool the red hot Auckland market.

However, another set of mortgage lending restrictions by the Reserve Bank could be on the horizon, Westpac chief economist Dominick Stephens said.

"If house prices continue on their current trajectory much longer, the Reserve Bank will start thinking about another round of mortgage lending restrictions,'' he said.

Analysts think the latest house price spike will deepen the Reserve Bank's woes.

It wants to boost inflation by cutting the cash rate to stimulate the economy but that would further stimulate the heated property sector and increase household debt.

The big change for the housing sector has been interest rates. Mr Stephens noted banks' extension of mortgage credit had risen from 5% a year ago to 8%.

"The evidence that interest rates are playing a role in the housing market lies in the facts that the market upturn is so widespread, and that households are taking on more debt,'' Mr Stephens said.

Quarterly house price inflation in Auckland went from 6.4% in September to -1.4% in December, Mr Stephens said.

"The quarterly data confirmed that house price inflation accelerated very sharply in the lower North Island and most of the South Island, except Christchurch.''

INZ regional commentator Liz Nidd, of Dunedin, said not since the previous housing market peak in November 2007 had there been a total number of sales beyond 277 in Dunedin.

"There is no sign of the pressure abating. This number is up significantly on the last two months - 208 and 215 respectively,'' Mrs Nidd said.

The median Dunedin sale price was $305,000, with a total March sales value of $94.3 million, but Mrs Nidd said the strength in the market was properties in the $200,000 to $400,000 bracket.

"It reflects significant buyer interest, not just from investors but also from the first-home-buyer market, where that first step on the property ladder in Dunedin is still a reality and not just a dream for some,'' she said.

Mr Stephens said the "power and extent'' of the March rebound took him by surprise.

The seasonally adjusted Auckland housing market turnover was up 11.3% and seasonally adjusted prices up 3.4%.

While not particularly surprised the Auckland market had rebounded, Mr Stephens said the tax and mortgage lending regulations introduced last year were always expected to have a temporary effect on house prices.

The recent rebound and data released meant "some pretty chunky changes'' to Westpac's forecasts of nationwide house price inflation, given house prices actually rose 10.7% in 2015, not 15.5% as previously thought.

"We have upgraded our forecast of 2016 house price inflation from 6% to 11.5%,'' he said.

Mr Stephens issued a caution, given the prevailing house prices and access to cheap finance at present.

The "borrow to spend facilitated by rising house prices'' was a dynamic New Zealand economists were all too familiar with, Mr Stephens said.

"It will support economic activity in the short run, but it also poses risks in the long run,'' he said.

Specifically, if interest rates rose, house prices would start to look less supportable, and present debt levels would be harder to service.

"Rising interest rates is not something we think is going to happen for a long while yet, but that may only mean that economic imbalances and risks have a longer time in which to build,'' he said.

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