The Reserve Bank of New Zealand has slashed the official cash rate by 2.25%, which has lowered mortgage rates by around 2% over the past year.
The sharp reduction in interest rates by the Reserve Bank is partly due to the heavy decline in New Zealand home prices.
According to Justin Fabo from Antipodean Macro, the REINZ house price index has collapsed to late 2019 levels in real inflation-adjusted terms.
Residential construction activity in New Zealand has also collapsed.
On Tuesday, the REINZ released its house price index for May, which rose by only 0.1% in seasonally adjusted terms. Prices also rose by only 0.1% year on year.
The result, while soft, was better than Cotality’s average dwelling price series, which recorded a 0.1% decline in May and a 1.6% fall year on year, to be 16.3% below the peak:
Source: Cotality (May 2025)
Commenting on the REINZ result, major bank ASB noted that “the housing market has been sluggish to date” and that the “continued softness in the housing market and domestic demand” is likely to “see the OCR move lower”.
“The housing market, like other sectors of the NZ economy, has been slow to respond to the reduction in mortgage rates”, ASB commented.
“The gloomy picture of the housing market to date is hard to fully explain, though a few factors stand out”.
“Firstly, the labour market has been weak and is expected to remain soft over the remainder of the year. Rising job insecurity and easing wage growth continue to weigh on home-seekers’ confidence in making buying decisions, especially amid heightened global uncertainties”.
“Secondly, easing population growth due to increasing Kiwis departing NZ and slowing migration inflows continue to dampen the demand for housing while lifting listings in the market”.
“The rental market has also flattened, dampening the demand for investment properties”.
“The emerging growth in demand that we saw earlier has started to soften, with house sales turnover recording a decline in May, and the residential lending data also beginning to decrease recently”, ASB said.
As a result, ABS believes that the “anaemic housing market and the lacklustre domestic demand” will prompt the Reserve Bank to “deliver cuts over 2025”.
One major upside is that the combination of heavy price cuts, falling interest rates, and lower immigration has made New Zealand housing more affordable to purchase and rent.
