A heat activated (preferably natural gas, propane, solar or waste heat fired) absorption heat pump water heater and heat exchange system. The heat driven absorption heat pump system extracts low grade heat from the ambient air and produces high grade heat suitable for heating water for domestic, climate control or process purposes in a storage tank. Flue gases exiting the absorption heat pump system are further cooled by the heated water to enable high (condensing) combustion efficiencies. The heat activated heat pump water heating system achieves COP of 1.5 or greater.