Independent global economic researcher Capital Economics (CE) has projected that house prices in New Zealand will experience a “modest” increase of 4% over the next year, followed by a further rise of 6% in 2026.
Marcel Thieliant, CE’s Head of Asia-Pacific, describes the anticipated recovery of the housing market as “muted.” He notes that while the RBNZ is expected to implement rate cuts, housing affordability remains a critical concern.
OCR is currently at 4.75%; RBNZ’s upcoming policy meeting is on November 27.
“While we expect the RBNZ to cut interest rates by the most since the GFC over the coming year, housing affordability was never as stretched at the start of an easing cycle as it was at the start of the current one,” Thieliant said.
“We only expect house prices to rise by a modest 4% over the coming year and by 6% in 2026. A housing market rebound will boost consumer spending and dwelling investment and put some upward pressure on inflation,” he added.
“However, that won’t prevent the RBNZ from slashing rates.”
Thieliant remarked that New Zealand’s house prices have experienced significant volatility, having skyrocketed by almost 50% from the end of 2019 to their peak in 2021, only to subsequently drop by nearly 20% when the Reserve Bank of New Zealand raised the Official Cash Rate to 5.5%.
“Since early-2023, house prices have moved sideways even as home sales have rebounded a bit and mortgage rates have already fallen by more than 1%-pt,” he said.
“If we’re right that the RBNZ will slash the OCR by 325 basis points from its peak, housing affordability should improve dramatically.”
According to Thieliant, the most reliable gauge of the potential strength of a housing rebound during a period of monetary easing is housing affordability at the beginning of that cycle. Regrettably, mortgage payments in relation to household incomes have never been as high at the start of an easing cycle as they are now.
He noted that a significant challenge for the housing market is the sharp decline in net migration, which has recently dropped below levels seen before the pandemic.
With the unemployment rate expected to stay above that of neighbouring Australia for the foreseeable future and the government having implemented stricter immigration regulations, population growth is likely to remain muted.
Thieliant also acknowledged that the Coalition Government has indeed made it more appealing for investors to acquire rental properties.
However, investors represent only one-fifth of all home purchases, and available data indicates that any increase in investor demand due to the policy changes has already occurred.
For Thieliant, the broader perspective is that the longer house prices remain stagnant, the more appealing housing valuations will become.
“We expect disposable income per employee to rise by around 4.5% this year. If that pace of income growth is sustained next year and in 2026 and house prices remain unchanged, the house price to income ratio would return to its 2019 average by late-2026.”