Is 2026 finally the year for housing’s recovery?

Surging net migration in late 2023 and falling mortgage rates in late 2024 led several forecasters to predict a strong recovery in house prices during each of the following years. But in both cases, those predictions were wrong, with prices falling 1.4% during 2024 and slipping another 1.2% over the nine months to September 2025.

Forecasts for house prices in 2026 are less upbeat than the strongest predictions we saw over the previous two years. Nevertheless, there is still a firm consensus across other forecasters that prices will rise this year, by between 3.7% and 5.5% (which is quite a tight range). But are housing market indicators looking any better than over the last 24 months?

The supply of homes available to purchase has continued to increase throughout the last year, with realestate.co.nz data showing a 3.1%pa lift in the stock of properties in December. Seasonally adjusted data in Chart 1 shows a small decline in stocks over the final two months of 2025, but property numbers are still higher than at any other time since mid-2015.

Put simply, plentiful supply continues to be a prevailing theme in the housing market, and it is acting as an impediment to any meaningful house price growth.

Chart 2 shows that house sales growth has also petered out during the second half of 2025, and November’s 5.7%pa fall in sales was the second-worst result since April 2023. The failure of sales volumes since April 2025 to continue pushing higher paints a picture of sluggish demand conditions among potential buyers.

We see several possible factors feeding into the sluggish demand conditions that have prevailed in the housing market throughout the last year.

The introduction of debt-to-income restrictions in mid-2024 appears to have been a significant constraint on some people’s borrowing ability. Previously, movements in interest rates have meant the amount of debt that people could theoretically service has changed throughout the economic cycle. For example, ultra-low mortgage rates in 2020-21 were a key factor driving up borrowing amounts and house prices. But tying maximum loan amounts to borrowers’ incomes appears to have prevented an increase in borrowing potential and the re-emergence of rising house prices over the last 18 months. The effectiveness of debt-to-income restrictions appears to have been so good that the Reserve Bank eased its loan-to-value ratio restrictions in December to the most relaxed they have been since 2015 (apart from during the pandemic, when the restrictions were removed completely).

In terms of sentiment, the FOMO of 2020/21 is also clearly missing from the market. Following the 15% decline during 2022 and the first half of 2023, average house prices are still 14% below their 2021 peak, making potential buyers acutely aware that property values are not a one-way bet. Expectations for house price movements across both ASB’s and ANZ’s surveys continue to hover around or below their long-term averages.

Regulatory conditions for investors have become more favourable again over the last 18 months, with the return of full mortgage interest deductibility as an expense and the reduction in the brightline test to two years. But declining rents across most of the country throughout 2025, with falls of as much as 9.0%pa in Wellington, have kept landlords under pressure and acted as a deterrent to further investment. The falling rents are symptomatic of weakness in broader economic conditions and much lower immigration than was seen during 2023 (more on that later).

Finally, the weak labour market has limited people’s willingness to take on more debt. Despite ending the year at a seven-quarter high, Westpac’s measure of employment confidence was close to record lows throughout 2025, while the unemployment rate lifted to a nine-year high of 5.3%. Amid this weakness, there was some demand from first-home buyers who found their savings stretching further than four years ago, but many people were happy to sit tight as rents edged downwards and servicing a mortgage still looked relatively expensive.

The Reserve Bank commented at the August 2025 Monetary Policy Statement that house “prices have declined to a level within the Reserve Bank’s range of sustainable house price estimates.” Downward revisions to these estimates by November meant that the Bank now sees house prices as being about 4% above its estimated sustainable range, but the central thrust of the argument remains: the Bank sees house prices as being only modestly overvalued. According to the Bank’s forecasts, this overvaluation is not significant enough to prevent average house price inflation of 3.6%pa over the next three years.

It concerns us that the Bank sees current house price levels as more-or-less “sustainable”, despite the fact that nationwide house price-to-income ratios have not been worse than they currently are at any time prior to December 2020. Leading into the pandemic, people were expressing some relief that the rapid and sustained house price inflation throughout much of the 2010s had moderated, but there was certainly no sense that housing at that point was affordable. In our view, there is a “recency bias” about current housing affordability – it doesn’t seem bad because housing is a lot more affordable than during 2021 and 2022. But the reality shown in Chart 3 is that, by longer-term historical standards, housing in New Zealand remains acutely unaffordable.

While that degree of unaffordability remains, we see limited scope for house prices to rise.

If the Reserve Bank’s attitude towards housing affordability seems to be somewhat carefree, it has nothing on The Treasury’s house price outlook. Treasury expects house price growth to average 6.8%pa over the five years to June 2030, with little more justification provided than “net migration picks up” back to an inflow of about 40,000 people per year.

Although Treasury’s house price forecasts are the strongest ones that have been published, Chart 4 shows that there is a consistent theme across other forecasters that house prices must rise from here. Unlike previous years, no one is picking double-digit house price inflation in the next 12 months, but there is a popular belief that, as the economy recovers, so will the housing market. Taking things a step further, the Prime Minister has suggested that a housing market with “modest and consistent” increases in house prices would seem to be necessary for an economic recovery to become more fully embedded.

We would note that Housing Minister Chris Bishop takes the opposite view, that house prices should fall outright. Work by successive governments has supported a higher supply of land becoming available for building, in and of itself helping shift the prevailing expectation of many that house prices will forever rise.

Although we recognise the historical correlation between house prices and household spending and, by extension, GDP growth, we are less convinced that this year’s economic recovery will be accompanied by any significant housing market pick-up. There is plenty of housing supply, limited demand, and major affordability constraints for potential buyers. The swing in financial market sentiment in late 2025, which saw a surge in wholesale swap rates, also suggests that mortgage rates might have bottomed out sooner and higher than was previously hoped.

But there are upside risks to our weak house price outlook. Another swing in financial market sentiment or a change in tone from the Reserve Bank could lead to another drop in mortgage rates, with rates of 4% or under potentially enough to breathe more life into the housing market. The gradual expected improvement in the labour market this year could also contribute to a lift in consumer confidence and more willingness to take on debt.

Perhaps most fundamentally, the most recent migration data from Stats NZ shows a possible trough in August last year, with the annual net inflow lifting from 8,700 to 11,900 by October 2025. There are often large revisions to the last six months of migration estimates, meaning that we can’t be confident of a turning point at this stage. However, we are conscious that any significant pick-up in net migration and population growth would boost demand for housing above our current assumptions. That outcome could see the excess supply of homes for sale eroded more quickly, creating conditions for more of a pick-up in house prices by the second half of 2026.

The next update to our house price forecasts will be published on Friday 30 January.