Squirrel says rate hikes will add pressure, but a slow recovery is still on the horizon
New Zealand's housing downturn is now officially the worst in the country's modern history, according to Squirrel's latest market update, even as a broader economic recovery slowly gathers pace behind the scenes, led by agriculture and a pipeline of infrastructure projects, with election-year uncertainty likely to keep business investment subdued until early 2027.
Worst downturn on record, but a slow turnaround is coming
On the housing market, Squirrel's assessment is blunt: nominal house prices are down around 18% on average nationally, while real prices, adjusted for inflation, have fallen roughly 30%, with steeper declines in Auckland and Wellington. That decline is still running: REINZ's House Price Index fell a further 0.9% in June compared with May, and was down 0.8% year-on-year, with the national median sale price sitting at $770,000.
Drawing on past downturns including the GFC and the 1987 crash, Squirrel noted that recoveries have historically taken five to 10 years in nominal terms and around 20 years in real terms. For Auckland specifically, where nominal prices are down about 20%, Squirrel's best-case scenario points to annual price growth of 4–5% once immigration and job growth return and excess stock clears, with the turnaround likely starting toward the end of this year.
Squirrel flagged one upside for buyers already active in the market: "The good news for first-home buyers is that there's never been a better time to get into the market, and it looks set to stay that way for a while yet."
Improved affordability, driven by falling real prices, is expected to persist even as nominal prices begin recovering, supported by planned RMA reforms aimed at keeping supply and demand more balanced through the next property cycle.
Inflation forces the RBNZ's hand
Any recovery will play out against a backdrop of rising interest rates. The Reserve Bank lifted the official cash rate to 2.5% on 8 July, a decision Squirrel says wasn't driven by current economic conditions so much as the risk of what's coming.
"By its own admission, there's still plenty of surplus capacity kicking around, and no hard evidence of a broad-based recovery yet," the update said.
The trigger was inflation data for the June 2026 quarter, released the same week, showing annual inflation at 4.1%, its highest level in two years and well outside the RBNZ's 1–3% target band.
Squirrel said the central bank is acting pre-emptively: "That's what the RBNZ is trying to get ahead of, so starting the transition back to neutral now is a pre-emptive move to make sure inflation doesn't become a stickier issue."
Despite the hike, Squirrel expects only modest further movement, with the OCR settling near its estimated neutral level of 3% within six months. Mortgage rates should land somewhere between 4.8% and 5.3% as a result, broadly in line with where they sit today.
Read the full report on LinkedIn.
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