New Zealand’s customary route out of recessions - a rebound in property values that restores household wealth and spending - has not materialised this time, leaving policymakers with limited options as fresh geopolitical tensions add to economic uncertainty.
After a forceful easing by the Reserve Bank of New Zealand that cut the official cash rate from 5.5% to 2.25%, housing has remained weak. House prices sit around 20% under their pandemic-era peak, depriving the economy of the wealth effect that previously supported consumption and confidence.
The situation has been complicated by the war in the Middle East. Rising oil costs tied to that conflict have fed global inflationary pressure and lifted borrowing costs internationally - dynamics that could push the RBNZ toward a more hawkish stance even as domestic indicators point to the country being in its weakest position since the global financial crisis.
"It’s sort of been thrown into question now with all the global uncertainty," said Nick Goodall, head of research at Cotality NZ. Goodall noted that he had earlier expected some housing market improvement this year as prices, mortgage rates and wages moved toward a new equilibrium. "The longer the war drags on, the worse it will get."
Policy, rates and the breakdown of the housing lifeline
The Reserve Bank already expects no increase in house prices in the year ahead. Mortgage borrowing in New Zealand is heavily influenced by the two-year swap rate, which climbed by nearly 0.6 percentage point this month in line with broader global rate moves. That rise undermines the effect of the RBNZ’s previous policy easing on household borrowing costs.
Domestic data released last week showed the economy cooled in the fourth quarter, with construction activity contracting and consumer spending remaining subdued even before the heightened disruptions tied to the war. The unemployment rate has risen to 5.4%, its highest level in a decade.
Analysts point to the speed and magnitude of the RBNZ’s post-pandemic tightening cycle as a key driver behind the collapse in the old relationship between interest rates and housing. Property values plunged, household debt-servicing costs jumped and the economy slipped into recession. Against that backdrop, government attempts to stimulate growth have been described as lacklustre, even as political pressure mounts ahead of the November 7 general election, which is likely to be shaped by voter dissatisfaction with the economy.
Prime Minister Christopher Luxon has so far offered little in the way of measures targeted at reviving the labour market, which remains under strain following waves of public sector job cuts last year.
Developments paused and projects uncertain
Real estate activity has been frozen in many locations, with a glut of available units and too few buyers to absorb them. High-profile projects have been affected. In Auckland, the planned 56-storey residential tower Seascape - intended to be the country’s tallest building - faces an uncertain future after developer Shundi Customs was placed in receivership this month.
In Wellington, an apartment development known as One Tasman was launched in 2021 and was due to be completed in early 2025. When visited last month, the existing structure on the site had been cordoned off but demolition had not yet occurred. Repeated calls to the developer Willis Bond went unanswered, and requests for interviews with company executives on LinkedIn were ignored.
"Launching in 2021 when the market was as hot as it could be, it’s a challenge for any developer to bring something to the market ... because the market turned very shortly after 2021," said Tamba Carleton, director of residential research at CBRE. "Quite a few other projects were in that situation, where they just had to go back to the drawing board until market cycle timing was more supportive."
Population outflows and household strain
The housing market has been further weakened by a pattern of outward migration among relatively affluent New Zealanders seeking better prospects abroad. Statistics New Zealand estimated a loss of 40,000 citizens last year alone, with more than 60% of those emigrants moving to Australia. Former prime minister Jacinda Ardern’s relocation to Sydney has been cited in public discussion as emblematic of the broader trend.
Local residents describe the effect on supply and demand. "Because thousands of Wellingtonians have left the area, the supply-and-demand seesaw has completely changed," said Brian Ellis, a 59-year-old retiree who recently sold his inner-city apartment for a price well below expectations. "It’s literally made a half-million-dollar difference to how much money I’m going to have to enjoy my retirement."
Labour-market scarring is also evident. David Laing, a former project manager, said he contemplated moving to Australia but did not because his wife retained steady employment in Wellington. Laing was laid off 18 months ago and reports he has had only a handful of interviews after sending hundreds of applications. "We’ve cut anything that’s not non-discretionary out of our budget," he said. "From a financial perspective, it definitely feels like the household is going backwards."
Implications and outlook
With housing unable to lift the economy as it has in past recoveries, New Zealand faces a constrained policy toolkit. Global inflationary pressures driven by the war in the Middle East have the potential to lift borrowing costs and complicate monetary policy choices even as domestic data show weakness across construction, consumption and employment.
For developers, homeowners and policymakers, the immediate challenge is balancing the need to support activity against the risk that external shocks will necessitate a tighter monetary stance. In the short term, a return to the housing-fuelled recoveries of previous cycles appears elusive.