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A cut could spark cheaper mortgage lending rates and throw heat back into the cooling housing market.
Mr Stephens' monthly wrap on housing said the Reserve Bank had "shocked markets" by signalling it was getting nearer to the "trigger point" of reducing the OCR, from its current all-time low of 1.75%.
"The game has now changed," Mr Stephens said.
Following the release of the Real Estate Institute of New Zealand's data for July, Mr Stephens said it appeared the housing market remained locked in a fairly subdued trend overall.
"July was a strong month for house prices, but that was countered by very weak sales numbers for the month," he said.
Nationally, there were just 42 more properties sold in July than a year ago, up to 5661.
Central Otago, Dunedin and Clutha reflected the national trend of sustained house price gains in the regions, while Auckland prices remained flat.
Mr Stephens had changed his prediction of a house price decline for the rest of the year then "modest rises" in 2019, because of the Reserve Bank moving closer to reducing the OCR.
He now predicted "flat prices" for the remainder of the year, followed by a "sharp, but short-lived", rise in prices in early 2019.
Nationally, he predicted a "vigorous" first quarter with 1.5% in house price increases.
He said because the financial markets had slashed wholesale fixed interest rates, in reaction to the Reserve Bank outlook, that meant there could be a drop in two-year fixed mortgage rates in coming months.
Mr Stephens was confident that a drop in mortgage rates would have a positive effect, because that had happened many times in the past.
After its ASB housing confidence survey, for the quarter to July, ASB chief economist Nick Tuffley said house price expectations were slow to recover.
"Price expectations may have rebounded back to pre-election levels, but they remain below recent highs," he said.
A net 38% of respondents expect higher house prices during the next year, which compared with an average of more than 44% since January 2015.
Mr Tuffley said respondents' expectations over interest rates were largely unchanged, with the majority still expecting higher interest rates in the year ahead.
"The balance of respondents still think its a bad time to buy, but views were the least negative in over two years," he said.
He noted the OCR had been on hold at 1.75% for just under two years, and expects it to remain so for at least another 12 months
The steady OCR had anchored the shorter-term fixed mortgage and also variable rates.
He said to date, any marginal moves in mortgage rates were largely because of inter-bank competition.
Westpac's Mr Stephens said "adding fuel to the fire", was the Reserve Bank considering loosening its loan to value ratio (LVR) restrictions, because of the cooling market and more subdued lending by banks.
"We continue to expect an LVR loosening will be announced in November and implemented in January, boosting the market early next year," he said.
However, Mr Tuffley said it was known neither how much impact the recently passed foreign buyers ban would have, nor the eventual impact of tax changes on house prices.
"It's impossible to tell just how much the anticipation of future tax change is impacting the market right now," he said.
Mr Tuffley also sounded a strong caution, reiterating Westpac's negative outlook longer term on house prices, given the Reserve Bank could not hold the OCR down forever.
He said mortgage rates would be on the rise in the 2020s and he was forecasting an almost 3% decline for 2020.