‘Misstep by the Reserve Bank’: Where house prices will go in 2026 as interest rate bogeyman returns
Sunday, 14 December 2025
The housing market has been torrid over the last few years.
Since house prices bottomed out in 2023, homeowners have seen the market go mostly sideways, with only a slight uptick in prices.
With most people having the majority of their wealth tied up in their home, this is a big deal.
Many property owners have banked their hopes on lower interest rates reinvigorating the market, as has been the case historically, but in the last week, we’ve seen a major bank raise its mid- to long-term rates despite the Official Cash Rate (OCR) sitting at its lowest level in years.
Comments made by the Reserve Bank Governor around the OCR announcement sparked a sharp reaction in the wholesale market (the place where banks and financial institutions go to lend money), which has led to predictions of interest rate hikes being brought forward months ahead of what was earlier expected.
A major bank economist believes the Reserve Bank may have gone too far in making the statements that led to this knee-jerk reaction.
“This is premature and they’re doing so in reaction to a misstep by the Reserve Bank with their November policy statement,” Kiwibank economist Sabrina Delgado tells me.
She explains this comes down to the language and the track the Reserve Bank has laid out for where interest rates should land.
According to Delgado, the Reserve Bank created the impression that there wasn’t sufficient room for interest rates to drop much further.
In response, those influential players in the wholesale market (who play a key role in determining how much it costs banks to access money) dropped their expectation of a further rate cut significantly, which has led to the situation of interest rates now rising.
Delgado’s argument is that if the Reserve Bank has left just a little more wriggle room, we wouldn’t have seen such a sharp reaction.
“Markets are now pricing this in, but it’s premature… Don’t get me wrong, a rate hike is good news because it means the economy is growing. But this only applies when you have that recovery. Yes, we’ve seen stabilisation in the data, and we’ve seen some positive signs, but those signs are still quite young.
“They need nurturing and not squashing.”
This is all about nuance and the signals the central bank sends to the market, explains. If the Reserve Bank had been more careful with its language and setting its expected track, we would not have seen this sudden reaction from the wholesale market.
The overarching problem is this could eat into the vulnerable consumer confidence slowly been building in recent months.
If consumers get spooked, then the confidence to spend could take a hit.
“The Reserve Bank do have the ability to step back in and try to talk the market down,” says Delgado.
“They could do that in February next year when they meet, or they could do it sooner through a speech.”
So where will house prices go next?
It’s no secret the housing market has not done well over the last year.
Delgado notes prices are only up 0.3% compared to October last year, and Auckland is only up 2% from the 2023 trough.
But there are some promising signs starting to come through.
Sales are up 6% from last year, and this suggests prices should go up in the coming year, provided confidence isn’t derailed.
“We’re expecting a modest recovery in house prices, with growth of about 2-3% next year,” says Delgado.
“It’s not going to be the 5-7% we’ve seen historically, but it’s definitely better than the sideways tracking we’ve seen over the last two years.”
To put this into perspective, a house worth $750,000 today could be worth $765,000 to $772,000 by the end of next year if this forecast bears out.
Even if interest rates do start to tick upwards, Delgado says rates are still much lower today than they were a year ago, meaning a large loan is still more affordable than it has been in recent years.
She also doesn’t expect a return of the high interest rates we have seen in recent years.
“Even if you did see a bit of tightening in interest rates, it’s more likely we end up with settings that put us back in a neutral position. We’re not going to levels where we had a 5.5% cash rate.”
These factors should lead to increased demand and increased prices, but the one caveat is that we still have greater supply than demand due to the number of new builds coming onto the market.
That means buyers have more choice and don’t necessarily have to pay the asking price on the first property they see.
As long as this high level of demand is maintained, the slower property prices will rise, which means that the paper value on biggest investment most of us hold will continue to grow slower than it has in the past.
If anything, it’s a reminder that we can’t only rely on property to build our long-term wealth. Like any investment, it’s subject to the ups and downs of the market.
Returning investors
Another positive sign in the market lies in the return of investors.
“In the last six months, lending to investors is almost 10% higher than lending to first home buyers,” says Delgado.
“It seems to be reverting to what it has been historically.”
The question now is whether the fear of further interest rate hikes starts to eat into that confidence in the coming months.
And the other big signal to watch in this space is the impact of the political debate on Labour’s proposed capital gains tax could have on investor sentiment as we move into election campaigning in the coming year.
The proof will be in the data
Katrina Ell, a senior economist at Mastercard, tells me the direction and speed of New Zealand's recovery will largely be contingent on a series of data sets to be released in the lead-up to the next OCR announcement.
These include gross domestic product (GDP), CPI (inflation) and labour market statistics, which will all send a clear signal as to whether the economy is in fact improving. These are also integral to the Reserve Bank when it comes to making a call on the OCR and monetary policy.
“New Zealand is a domestically driven economy, and at the heart of its economy is the consumer,” says Ell.
“The recovery momentum right now is still quite fragile, [and if it] is actually going to strengthen, we need to pay incredibly close attention to what happens with the labour market. It's one thing for rates to be coming down, but if job prospects don't materially improve, then we're not going to see households get more confident and more exuberant when it comes to spending.”
This also has important repercussions for the housing market, because a lack of attractive job opportunities could lead to potential house buyers in this market heading abroad – which has been one of the defining trends of 2025.
“New Zealand's labour market has been incredibly soft,” Ell says.
“If we don't see improvement in the labour market, outbound migration isn't going to improve, and that’s also an important driver of the weakness in domestic demand as well.”
If people don't have jobs or if they don’t have the prospect of improving their economic circumstances by finding better jobs, then they are less likely to take on the large quantities of debt required to purchase a new home.
The point Ell makes here is critically important. While interest rates might be a good indicator of where things are tracking, so much of this comes back to the individuals who have to choose whether they can truly afford to spend.
The coming months will be telling, not only in determining whether the economy is on the right track but also whether the Reserve Bank made the right call in suggesting we’ve reached the end of the interest rate easing cycle.
If the numbers aren’t quite as promising as expected, then, as Delgado suggests, we may need to return to nurturing those green shoots rather than crushing them.