The bank previously forecast a 9% drop, but has adjusted its prediction following signs of resilience in the market.
In its latest report, economists led by Jarrod Kerr (pictured), say house price falls "should meet strong resistance", with the regions faring better than expected, and the working-from-home trend fuelling demand.
"We're simply more confident that the downside risks are receding," the report says.
While the bank expects unemployment to rise to 9%, it believes credit conditions will remain strong, underpinning house price stability.
"Unlike previous recessions, the impact on the financial system was limited. Banks are lending, and the appetite to do so remains strong. If all goes well (big if), a 5-6% dip in house prices would represent a very mild reaction to such a dramatic economic upheaval."
"The supply of homes has increased sharply. But we’re still falling short to the tune of 80,000 houses," the economists said. "The impact of Covid-19 casts a long shadow over the construction industry into 2021. Commercial property looks likely to bear the brunt of the adjustment."
Kiwibank says there are three strong foundations to support the housing market, the shortage of homes, low mortgage rates, and population growth – expected to surge as overseas Kiwis return home.
The state-owned lender's report gives a snapshot of the nation. The Auckland market gets a four to six out of 10 rating amid increasingly inflated prices. The bank gives the Queenstown market a four out of 10 rating, while the Bay of Plenty gets eight out of 10, due to persistent strong demand.