REINZ\u2019s house price index showed a modest rebound after bottoming out in early 2023, but momentum has faded. The index rose just 0.3%<\/a> in the year to June, despite a 170 basis point drop in the 2-year swap rate.<\/p>\n Economic activity has also stumbled. GDP rebounded through the December and March quarters after a sharp mid-2024 contraction, but likely contracted again in June. The Reserve Bank\u2019s nowcast<\/a> estimates a 0.3% fall<\/a>.<\/p>\n The link between the two trends is a chicken-and-egg problem. Is housing weak because the economy is soft, or is the economy soft because housing is?<\/p>\n Bernard Hickey, an economic commentator and Interest.co.nz alumnus, wrote in his newsletter<\/a> that New Zealand\u2019s \u201chousing-market-with-bits-tacked-on\u201d economy was struggling because buyers weren\u2019t bidding up prices as they had in past recoveries.<\/p>\n Kiwibank chief economist Jarrod Kerr said in a note that further cuts to the Official Cash Rate were needed to stimulate housing demand if \u201coptimistic\u201d growth forecasts were to be met.<\/p>\n But that kind of thinking frustrates Housing Minister Chris Bishop, who wants to break the link between rising house prices and economic growth.<\/p>\n \u201cDestroying the idea that the economy should be based on house price growth is a fundamental formula this government is trying to embed into the New Zealand psyche and into the arteries of the economy,\u201d he told Interest.co.nz on Tuesday<\/a>.<\/p>\n Outrageous fortune\u00a0<\/p>\n Property has an outsized influence on the New Zealand economy because of the sector\u2019s scale. It contributes 15% to annual GDP<\/a> and accounts for more than half<\/a> of all household assets.<\/p>\n Housing downturns can deepen recessions by curbing household spending and slowing construction and employment. The reverse is also true, though the lift from rising prices is typically smaller than the drag from falling ones.<\/p>\n And it\u2019s not just households. Weak house prices also dent small business confidence and activity, as banks often secure those loans against residential property.<\/p>\n While most economists agree that rapid house price growth isn\u2019t necessarily desirable, many also acknowledge that a broader recovery will be harder without it.<\/p>\n \u201cIt sucks a lot of growth out for sure,\u201d Kerr said, when asked what happens if house price gains are removed from Kiwibank\u2019s forecast model.<\/p>\n The state-owned bank expects prices to rise between 5% and 7% in 2026, though it admits it had a similar forecast for 2025 which didn\u2019t pan out. It now expects prices to rise about 2.5% this year and has revised its GDP forecast down from 1.4% to 0.9%.<\/p>\n Residential prices climbed roughly 8% a year in the five years before the pandemic and surged after the 2020 stimulus. Annual growth briefly hit 30%, setting up home-buyers for a painful correction a year later.<\/p>\n The Reserve Bank expects more moderate gains ahead. In May, it projected annual house price growth would settle at 4.2% in the coming years, after peaking at 5% in late 2026.<\/p>\n Housing-lite recovery<\/p>\n Mike Jones, chief economist at BNZ, said it wasn\u2019t clear whether the weak housing market was slowing the broader recovery, or if it was the other way around.<\/p>\n \u201cI tend to think about most of the causation running from house prices to the economy. Like any asset cycle when house prices rise there is a feel-good or wealth effect which goes on to boost consumer spending, housing investment, new construction and the economy more generally,\u201d he said in an email.\u00a0\u00a0<\/p>\n \u201cBut I think we\u2019re also seeing some causation looping back around in the other direction, particularly at this stage of the cycle.\u201d<\/p>\n Many would-be buyers feel insecure about their jobs and are reluctant to take on large mortgages, especially after watching the previous wave of buyers get caught out.<\/p>\n Jones said lower interest rates had clearly lifted the number of transactions, but prices wouldn\u2019t rise meaningfully until the backlog of listings<\/a> was cleared.<\/p>\n \u201cThat\u2019s no bad thing from an affordability perspective, but a \u2018housing-lite\u2019 economic recovery does slow us up relative to what we might have seen in past cycles.\u201d<\/p>\n More butter, fewer builders<\/p>\n Infometrics, an economic consultancy, expects New Zealand\u2019s \u201cpatchy recovery\u201d to strengthen through the rest of the year\u2014with or without house price growth.<\/p>\n Fresh forecasts published Friday predicted agricultural exports would lift annual GDP growth to 2% by the second half of 2026.<\/p>\n Chief forecaster Gareth Kiernan said he agreed with Chris Bishop that house prices were already high and unlikely to lead the recovery. His projections assume \u201cpretty flat\u201d price movements.<\/p>\n That would slow the pace of broader economic growth, he said, but was likely a worthwhile trade-off if it improved long-term affordability.<\/p>\n![](\"https:\/\/www.newsbeep.com\/au\/wp-content\/uploads\/2025\/07\/consumption-house-prices.png\")
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