Inside Economics: Outlook for housing in 2025...do we really want another boom?

What's in store for house prices in 2025 - stock image

Welcome to Inside Economics. Every week, I take a deeper dive into some of the more left-field economic news you may have missed. To sign up for my weekly newsletter, click here. If you have a burning question about the quirks or intricacies of economics, send it to liam.dann@nzherald.co.nz or leave a message in the comments section.

Housing to the rescue?

Q: What is the outlook for the housing market and do we really want it to start booming again?

A: Whether we like it or not, the housing market remains central to New Zealand’s economy. It is a barometer of economic health and a driver of economic confidence.

So it’s not surprising there’s a lot of focus on whether it can get up off the canvas in the year ahead. Whether we want it to start booming again is another matter.

As we have seen in the past, that can create fresh problems around housing affordability and short supply and it can blow out our debt to precarious levels that make international rating agencies look at us funny.

But a bit more life would probably be useful as a firestarter for economic growth.

When house prices are rising, homeowners tend to feel a bit more relaxed about the size of their mortgage and are more likely to get out and spend more.

Called the wealth effect, it might be a mirage of nominal paper value but it seems to have very real knock-on effects for the economy.

An increased volume of sales also helps put a bit of life directly into the property sector, which is itself a fairly sizeable chunk of the domestic economy.

The latest analysis from the Property Council estimates the sector’s direct contribution to GDP has risen to $50.2 billion and accounts for 15% of the country’s total GDP.

I’m not sure that’s such great news for our long-term economic health. I’d like to see more growth in sectors that earn export dollars and address our current account deficit.

As house prices rise, we all have to take bigger mortgages, which means even more interest heading offshore to Australian banks.

But whatever, that’s a big structural issue that gets plenty of attention.

The reality is that as a significant chunk of our economy, the fortunes of the property sector are entwined with all of our fortunes. There are many companies (not least media) that will see their performance improve when the market picks up.

Where to from here?

So, after years in the doldrums, are we about to see the market take off?

As ANZ economists point out in their latest quarterly outlook: “The housing market is the place to look for early impacts of the reduced cost of new debt, and there is evidence the vibe is shifting, with a marked lift in the proportion of houses successfully selling at auction.”

The last Real Estate Institute sales data for October presented a mixed picture according to ASB economists.

The seasonally adjusted House Price Index (HPI), which is the preferred measure for most economists (See more on that below), dropped by 0.5% over the month.

Prices remain lower than where they were a year ago — down by 1.1% annually.

The HPI shows prices boomed from mid-2020 to a record peak in late 2021. Then they slumped to a trough in mid-2023 before a much smaller rising and falling through two mini peaks in mid-2023 and earlier this year.

They’ve fallen through most of this year.

Only four regions posted monthly gains, ASB noted, with Nelson experiencing the highest increase at 1.8% mom (seasonally adjusted).

It’s been a rocky ride on low sales volumes for the past couple of years.

But interest rates are the key driver and they are falling now. We should get another 50 basis point cut to the OCR later today.

However, how much of that will get directly passed through to mortgages isn’t as clear.

Mark Lister from Craigs Investment Partners has taken a look at that and concludes that we may not see fixed rates fall much at all — perhaps by around 10 basis points.

That’s because the cut is so well signalled that it is largely priced in. Plus international borrowing rates have risen since the US election on expectations that Trump’s policies will be inflationary.

Have we hit bottom?

“The housing market has likely troughed,” Westpac economists concluded in their latest economic overview.

“Sentiment in the housing market has improved as the RBNZ has reduced the OCR and mortgage rates have fallen,” they wrote.

“For now, the momentum in house prices remains limited, with prices moving sideways in most parts of the country.”

There were still high levels of listings compared to buying activity which meant buyers still had plenty of choices and faced little urgency to buy.

Concerns about rising unemployment and the still weak economy were also still constraining house prices. But lower interest rates were laying the basis for a solid recovery, they wrote.

Westpac economists have increased their forecasts for house price growth over 2025, with easier financial conditions to boost activity and prices.

They now expect about 8% growth on the national Reinz House Price Index next year and about 5% in 2026.

They described that as a “solid but not exceptional” gain given unemployment will be at cycle highs and population growth at cycle lows in 2025 and 2026.

ASB also expects the housing market recovery become more pronounced in the latter half of 2025.

“By then, sales activity should strengthen sufficiently to counterbalance the high levels of housing stock on the market, which is crucial for the short-term trajectory of house prices,” they conclude.

Property analytics company CoreLogic’s latest data showed property sales activity increased by 16% in October compared to the same time last year, the 17th increase in the past 18 months.

However, sales volumes remained 10–15% below typical seasonal levels, reflecting cautious buyer behaviour amidst “ongoing affordability challenges”.

CoreLogic NZ chief property economist Kelvin Davidson. Photo / Peter Meecham

Despite a significant rise in sales activity to 78,360 over the past 12 months, volumes were still well below the long-term annual average of 90,000 sales, CoreLogic NZ chief property economist Kelvin Davidson said.

“The abundance of listings on the market is providing buyers with significant choice, allowing them to take their time and negotiate favourable deals.

“This buyer caution is reflected in the CoreLogic Home Value Index, which has recorded eight consecutive months of decline, with national property values now 18% below their post-Covid peak.”

CoreLogic also noted the first home buyers (FHBs) set a new record last month, making up nearly 28% of purchases in October.

This milestone reflected their ability to leverage lower property prices, reduced competition from other buyer groups, and options like KiwiSaver withdrawals and low-deposit financing options at the banks, Davidson said.

Investors were also showing signs of returning, with mortgaged multiple property owners (MPOs) accounting for 23% of purchases, up from earlier in the year.

Falling mortgage rates and easing loan-to-value ratio (LVR) restrictions appeared to be creating more favourable conditions for this group — alongside smaller tax bills as mortgage interest deductions move back towards 100%, he said.

Davidson cautioned against expecting a strong, near-term housing market rebound despite falling mortgage rates. After all, credit remains constrained for some buyers, with high loan-to-value ratio (LVR) lending still facing restrictions and debt-to-income (DTI) limits on the horizon.

Looking ahead ANZ economists note that as well as lower interest rates, economic tailwinds include easing credit conditions, higher dairy prices,

and population growth (although that has slowed a lot recently). Key headwinds are weak global growth (particularly in China) and rising unemployment.

“This recession was caused by high interest rates, so lower rates are likely to be an effective cure, but not an instant one,” they say.

Just for good measure, they add a warning on inflation: “If the housing market gets wind in its sails over 2025, housing-related components of the CPI could easily join in to see headline inflation settles above the 2% target midpoint over the medium-term.

That of course would force the Reserve Bank to curb its interest rate cuts, which would potentially take the wind out of those housing market sails.

In theory, if it’s all balanced around appropriate interest rate settings, the whole system should be self-correcting. In reality, it is seldom that simple.

Renewed confidence

On Tuesday, the ASB released its latest Housing Confidence Survey. It showed confidence is continuing to rise with a significant jump in the number of Kiwis who believe now is a good time to buy, ASB data shows.

A net 24% of respondents expected house prices will rise in the three months to October, up from a net 13% in the previous quarter.

A net 20% believe now is a good time to buy, up from 8%.

Falling mortgage rates were largely driving the confidence boost, ASB senior economist Kim Mundy said.

A net 57% of respondents expect lower interest rates to come — the highest rate recorded since the survey began in 1996 — and up from 20% in the three months to July.

Optimism was particularly strong in Auckland, where a net 29% of respondents are expecting house-price increases, up from 13% last quarter.

But it could take some time before this confidence translated into a pronounced upswing in house prices, Mundy said.

“Our survey data shows overall confidence levels remain lower than what we observed at the start of the year (close to 72% of those surveyed expect house prices to remain flat or rise, compared to 90% in Q1 2024) which suggests New Zealanders may be concerned about other economic impacts that may hinder house price gains such as rising unemployment and slowing net migration.”

“With another 50 basis points (bps) cut to the Official Cash Rate (OCR) forecast this week and further cuts anticipated in 2025, we expect New Zealanders’ expectations around each of the metrics we track against to evolve in line with our view that we’ll start to see higher house prices in 2025,” Mundy said.

What is the REINZ House Price Index and why do economists like it?

When it comes to house price data there is no shortage of reports and metrics. All of them offer a good snapshot of market conditions. Generally, it’s a good idea to consider them in aggregate.

However, the Reinz House Price Index is the preferred measure for most economists when they look at the trend in the market.

It was developed in partnership with the Reserve Bank and is used by the RBNZ forecasting and macro-financial teams, plus the major banks.

Economists like it because it adjusts the composition of the monthly data, ensuring that it is not skewed by a few high-value sales. New Zealand is a small market and it can only take a handful of multimillion-dollar mansion sales to push the average or median price up.

The index does this by factoring in how prices in a market are influenced by a range of attributes such as land area, floor area, number of bedrooms etc to create a single, more accurate measure of housing market activity and trends over time.

Using the Reserve Bank’s preferred Sale Price to Appraisal Ratio (SPAR) methodology, the Reinz HPI uses unconditional sales data (when the price is agreed) rather than at settlement, which can often be weeks later. It is therefore more accurate and time.

Because it is an index it doesn’t give us dollar prices. But it shows how prices have moved across time relative to the index benchmark.

Obviously, people like to see a dollar figure when they are considering house prices. So even when the media reports the latest Reinz statistics, the House Price index is often buried beneath headlines for average or median prices.

Liam Dann is business editor-at-large for the New Zealand Herald. He is a senior writer and columnist, and also presents and produces videos and podcasts. He joined the Herald in 2003. To sign up to my weekly newsletter, click on your user profile at nzherald.co.nz and select “My newsletters”. For a step-by-step guide, click here. If you have a burning question about the quirks or intricacies of economics send it to liam.dann@nzherald.co.nz or leave a message in the comments section.