Growth outlook strengthens as recovery broadens
New Zealand’s long‑standing reliance on rising house prices to fuel growth is being challenged, as new data show consumers spending more even while property values barely budge.
Retail resilience challenges property‑led growth model
In its latest Weekly Economic Commentary, Westpac reports that “retail spending has consistently risen over the last five quarters” despite house prices being effectively flat over the same period. That pattern undercuts the idea that a recovery cannot take hold without a renewed housing boom.
For years, the so‑called “housing wealth effect” has dominated thinking about New Zealand’s economic cycle: households feel richer when property values climb and loosen their purse strings.
But a growing body of research – echoed in Westpac’s analysis – argues that what we see as a housing story may really be an income story.
There is “growing support for the idea that what we observe as a ‘housing wealth effect’ is actually more of an ‘income expectations effect’, driving both spending and house prices higher,” Westpac senior economist Michael Gordon (pictured) said.
Income expectations and policy support drive demand
In other words, when people expect better pay and stronger job prospects, they not only spend more but are also willing to pay more for homes, especially in a market where supply has been slow to respond.
That helps explain why retail volumes are lifting even though the latest easing cycle has not delivered the usual surge in property prices. Supportive export prices, a favourable exchange rate, and low short‑term interest rates are adding momentum, with business investment and confidence already picking up from the soft patch seen through mid‑2025.
Muted house prices despite above‑trend GDP
Westpac is not forecasting a housing boom from here. It is picking only modest gains of around 4% for 2026, while the Reserve Bank assumes flat prices.
Ample existing stock for sale and a robust pipeline of new residential building through 2026–27 are expected to keep a lid on house price inflation, even as GDP runs above trend.
Even so, Gordon argues that “spending growth of 3-4% over the year ahead is quite achievable in the early stages of a recovery, when the economy still has substantial spare capacity to be used up.”
Geopolitics and RBNZ stance remain key risks
Looking ahead, Westpac economists are projecting a stronger medium‑term upswing, with GDP expected to grow about 3.3% in 2026 after an estimated 1.8% expansion in 2025, and unemployment gradually easing from around 5.4% to below 5%.
Geopolitics could complicate the outlook. Escalating US–Iran tensions threaten global oil supply, pushing fuel costs and near‑term inflation higher. But Westpac expects RBNZ to look through temporary price spikes and keep rates on hold, as policymakers watch whether this rare “houseless recovery” can truly stick.
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