4000 underwater homeowners are quietly freezing New Zealand’s labour market

The trap most coverage is missing

The numbers are grim enough on their own. Cotality chief economist Kelvin Davidson estimates at least 3,600 households owe more than the value of their homes, and that figure assumes everyone bought with a full 20% deposit. Plenty didn’t, so the true count rounds closer to 4,000. Most bought at the top of the market: about 29,000 first-home buyers purchased in the 18 months from late 2021, and a large chunk of them are now underwater.

Every outlet will run this as a household hardship story. That’s the easy angle, and it’s true. But for business owners the more useful frame comes from Otago University economist Murat Ungor, who cuts through the panic: negative equity is “a balance-sheet problem, not a cash-flow one, as long as they keep servicing the mortgage”. The bank won’t call the loan. But, Ungor adds, it does trap people: they “cannot easily sell to move for a better job, and they cannot use their home as collateral to start a business.”

That is the story. Two quiet mechanisms, both concentrated in the two cities where most of the country’s commercial activity sits.

The mobility trap

Start with labour. National prices are still down about 17% from the 2021 peak, with Auckland and Wellington off more than 20%. QV data from July 2026 put Auckland’s average value at $1,173,343, down 23.9% from the January 2022 high. Meanwhile Canterbury and Otago have clawed back to prior peaks.

So the geography works exactly against the labour market. A worker underwater on an Auckland townhouse who wants to take a better job in Christchurch or Southland can’t sell without crystallising a loss that wipes out their deposit and then some. One buyer told RNZ that after adding a $35,000 agent fee, “we’ve lost half our deposit”. Another watched their peak-bought house drop “at least $200,000 easily”. Those people stay put. Employers in the growth regions feel it as harder hiring; the metro job market loses a bit of its normal churn.

The collateral trap

The second drag hits small business formation. A big share of new ventures in this country are seeded by borrowing against the family home. When the home is worth less than the loan, that door shuts. No equity to draw on means no cheap startup capital, and no expansion funding for the sole trader who wanted to hire their first employee. Multiply that across a cohort of thousands sitting on their least productive years for risk-taking and you have a structural, if unglamorous, brake on new business.

Mortgage broker Campbell Hastie of Hastie Mortgages notes the trapped also pay more: borrowers with less than 20% equity face low-equity premiums on top of their interest rate, a cost that compounds the squeeze.

The pipeline is still filling

Here’s the part almost nobody is reporting. The cohort of vulnerable borrowers is still growing. RBNZ data shows 51% of new first-home buyer lending in April 2026 was above 80% LVR, $847 million of $1,653 million that month. Total new mortgage lending has climbed 35% in two years. First-home buyer activity remains strong, with HUD reporting active listings at a decade high of 37,500 and prices broadly flat. Buyers are still taking on thin-equity debt into a market that isn’t recovering.

The banks are fine. The recovery isn’t fast.

The financial stability picture is genuinely reassuring. The Reserve Bank estimates less than 2% of mortgage debt is in negative equity, and non-performing loans remain negligible. Bruce Patten, chief executive at New Zealand Financial Services Group, says we’ve so far avoided the GFC-style wave of mortgagee sales and advises the trapped to “sit tight for a few more years.”

The problem is how many years. Davidson has called this “the longest and deepest downturn in 30 or 40 years”, warning that recovery “may be a story for next year” and that buyers are turning warier. Affordability has returned to more normal levels for new entrants, but that’s cold comfort for the 2021 cohort. Back in October 2024, CoreLogic reckoned it could take at least five years at 4% annual growth for wiped-out buyers to break even. Two years on, the problem has deepened, not resolved.

So the banking system holds, as it should. But a labour market that can’t reshuffle its workers and a startup economy short of its usual home-equity fuel is a slow, structural cost. It won’t show up in a bank’s loan book. It shows up in the vacancies that stay open in the regions and the businesses that never get started.

Sources

• ‘We’ve lost half our deposit’: About 4000 first-home buyers owe more than their homes worth (2026-09-03)
• Home buyers feel pain of property price slump from 2021 market peak (2026-07-01)
• Property market’s ‘longest and deepest downturn’ in 30 or 40 years (2026-08-01)
• ‘Marked improvement’ in housing affordability – Cotality (2026-08-19)
• Housing market update – March Quarter 2026 (2026-03-01)
• Five years for ‘wiped out’ first-home buyers to get back on track (2024-10-19)