The residential property market may be close to bottoming out, as the drop in prices eases slightly for a second month in a row - but the potential for further volatility continues.

The latest Quotable Value (QV) House Price Index showed national home values fell 3.4 percent over the three months to the end of May, slightly slower than the 3.5 percent quarterly fall in April and the 3.9 percent in March.

QV operations manager James Wilson said it was still too soon to say if the market had hit the bottom.

"It is still very early days and sales volumes remain low across the country. We would still need a few more months of continued softening to claim conclusively that we're at the bottom of the market."

The national average value was down nearly 14 percent on a year earlier to $888,930, but still 20 percent up on the pre-Covid-19 level.

Average values fell in 11 of the 16 largest urban centres, including Auckland (-2.3 percent), Hamilton (-2 percent), Christchurch (-2.5 percent), and Wellington (-2.6 percent).

Wellington's average rate of decline (-2.6 percent) had dropped below the national average (-3.4 percent) for the first time since the downturn began.

Queenstown continued to buck the downward trend among the main centres, with home values rising by an average of 2.4 percent in the May quarter.

Otherwise the quarterly rate of decline increased in Tauranga (-4 percent), New Plymouth (-2 percent), Nelson (-2.4 percent) and Marlborough (-4 percent).

"When the market does hit bottom, we won't suddenly see values begin to increase across the board," Wilson said

"Instead, what we're likely to see is a bumpy landing, with some centres reaching the bottom of their descent before others.

"Certain locations and property types may begin to experience some growth sooner rather than later, whereas others may remain flat or continue to soften for a period."

First-home buyers likely to be hit first

He said areas that appealed to first-home buyers and investors would likely be the first to rise.

"Most areas of the country that have experienced positive value growth or held relatively steady over the last quarter have had average values of well below $1m. In other words, 'first-home buyer territory'."

Wilson said investors were less active in the market, as many adopted a wait-and-see approach in many markets.

"However, indications that the official cash rate has peaked could entice them back, with valuers and real estate agents at the 'coal face' of the market already reporting a small uptick in interest.

"Time will tell whether we do see a growing number of investors represented in sales volumes over the next few months, competing for entry level stock."

Wilson said a high level of uncertainty continued to hang over the housing market as an investment.

"There's a generally cautious mindset out there, especially among many 'mum and dad' buyer types.

"While these buyers remain inactive, value levels in areas that used to be strong are likely to remain pretty weak. Strong net migration numbers may add some heat into the housing market over time, but it's likely we'll begin to see the impact of this on the rental market first."

He said winter was typically weak, and especially ahead of an election.

"However, history shows us that elections don't typically have a significant impact on the housing market.

"Most likely, we'll see some buyer types remain on the sidelines until the result comes in. But it looks likely we're in for a few more bumps in the road between now and then."

This story was originally published by RNZ