Rate cuts shift housing market trends across Tasman
Westpac senior economist Satish Ranchhod (pictured) says New Zealand is entering a new phase of the economic cycle, with GDP growth set to outpace Australia over the next few years after lagging behind in 2024.
“When we last peeked over the Tasman in late 2024, the Australian economy was enjoying more robust economic conditions than New Zealand,” Ranchhod said. “Jump forward a year and we are now moving into a new phase of the economic cycle, with economic growth in New Zealand set to outpace Australia over the next few years.”
Westpac forecasts New Zealand’s GDP to rise 2.4% by the end of 2025 and 3.1% in 2026, supported by aggressive rate cuts and firmer export prices. Australia is expected to grow 2% in 2025 and 2.2% in 2026, as fiscal constraints slow public investment.
Still, Ranchhod’s forecasts come against a backdrop of weak business sentiment, with demand, the economy and politics ranking as top concerns.
Economists note confidence has improved since the RBNZ began cutting rates in 2024, but weaker household spending, a soft labour market, and global trade uncertainty – including new US tariffs on New Zealand exports – are limiting the pace of recovery.
Diverging monetary policy
The Reserve Bank of New Zealand (RBNZ) has already cut the official cash rate (OCR) by 250 basis points to 3.00% over the past year, with another 50bp expected before year-end.
“Over time, that will help to boost both domestic demand and employment,” Ranchhod said.
By comparison, the Reserve Bank of Australia (RBA) has only reduced rates by 75bps so far in 2025, leaving its cash rate at 3.60% – slightly above neutral levels.
“Despite the slower pace of monetary easing, Australia’s economy and labour market have remained firmer than in New Zealand,” Ranchhod said.
Other economists say the RBNZ’s sharper moves reflect deliberate choices. Kiwibank chief economist Jarrod Kerr said the RBNZ had been “super aggressive” during its tightening cycle, deliberately inducing recession fears to curb inflation. ANZ’s Miles Workman added that this “shock value” likely amplified the potency of monetary policy, while New Zealand’s larger fiscal expansion also required higher rates than in Australia.
Inflation pressures remain
Inflation is easing on both sides of the Tasman, but near-term dynamics differ.
- In New Zealand, headline inflation has lifted back to 2.7% and is expected to exceed 3% in coming months, driven by food prices and rising local council charges.
- In Australia, headline inflation was temporarily reduced by energy subsidies, but core inflation is forecast to cool into the lower end of the RBA’s target band by 2026.
Labour market divide
New Zealand’s labour market remains under pressure, with employment down 0.9% over the past year and unemployment up to 5.2%, projected to rise slightly higher before recovery in 2026.
Australia, however, continues to show resilience, with employment growing 2.3% over the past year and unemployment only expected to lift modestly from 4.2% to 4.5%.
“Even so, wage gains in Australia are expected to continue outpacing those in New Zealand,” Ranchhod said.
Housing market outlook
House prices in New Zealand fell 17% from their peak as rates rose but have since stabilised, supported by rate cuts and steady new construction.
In contrast, Australia’s housing market has proven more resilient, with only modest falls during the tightening cycle and firmer growth over the past year.
“While firmer than in New Zealand, recent housing market momentum in Australia has been modest compared to historic trends,” Ranchhod said.
Migration trends and demand
Migration flows have also diverged. Many New Zealanders moved abroad, especially to Australia, amid weak labour market conditions. But Ranchhod expects net outflows to stabilise as New Zealand’s recovery gains traction.
“New Zealand’s sharper downturn over the past year means that our economy has a much greater degree of spare capacity than Australia,” he said. “That difference is set to persist for some time, even with the forecast recovery in growth.”
Trade and fiscal outlook
Australia’s trade balance has swung into deficit as demand for hard commodities eases, while New Zealand’s deficit is shrinking on the back of dairy exports and recovering tourism.
Fiscal settings are also diverging, with New Zealand shifting toward restraint while Australia winds back earlier stimulus and cost-of-living supports.
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