Navigating Change: New Zealand's 2026 Real Estate Market Policy, Credit, and Interest Rate Dynamics

Question

What is the core conclusion for the New Zealand real estate market from 2026 onwards in the executive summary?

AIAIGAnswer

This report focuses on three key themes: the "Granny Flat" Building Consent Exemption Act, RBNZ easing LVR restrictions, and whether mortgage interest rates might enter the '3% range'. The conclusions are:

- The market is in a phase of gradual "thawing", not a repeat of the 2020–2021 boom.
- The macroeconomic backdrop is complex and fragile: although out of a technical recession, inflation remains high and the labor market is cooling, which restrains recovery.
- Granny Flat Act: simplifies the construction process for small houses ≤70㎡, shifting compliance responsibility from councils to homeowners and LBP (Licensed Building Practitioners), approximately 13,000 units over ten years (about 1,300 annually), with an overall moderate impact, but potentially catalyzing the prefabricated/modular industry.
- LVR easing: is a strategic recalibration after DTI becomes the primary guardrail, with limited short-term effects and long-term room for upside cycles, relatively benefiting first-home buyers.
- Interest rate path is a key uncertainty: optimistic views suggest one-year fixed rates might enter the '3% range' (≈3.99%), while mainstream banks mostly expect ≈4.5%. The landing point of interest rates will directly determine affordability, sentiment, and policy effectiveness.
- First half of 2026: influenced by high inventory and cautious sentiment, a buyer's market still dominates; full recovery depends on clear and sustained improvement in the broader economy and employment.

Policy effectiveness is constrained by macroeconomic factors. The economy has just emerged from recession but the recovery is fragile, with sticky inflation coexisting with cooling employment, requiring the RBNZ to make delicate trade-offs between controlling inflation/stabilizing growth/preserving employment.

- The Treasury projects in the 2025 Budget: for the fiscal year ending June 2026, real GDP growth of 2.9%.
- The NZIER consensus is more cautious: average annual GDP around 1.5% for the same period.
- Since Q3 2022, per capita GDP has cumulatively decreased by 4.6%, a decline deeper than during the global financial crisis, explaining the persistent cautious sentiment.
- Stagnant/declining house price growth and high inventory of properties for sale indicate the recovery has not yet transmitted to the real estate market.

- As of the September quarter 2025, CPI year-on-year is 3.0%, hitting the upper bound of the target range (1%–3%).
- Primarily driven by domestic/non-tradable goods: Electricity +11.3%, Rent +2.6%, Local government rates +8.8%; these three items account for approximately 17% of the weighting and are all non-discretionary expenditures, directly squeezing household budgets and the ability to save for a deposit.
- Forecast: With increasing spare capacity, inflation may fall back to the 2% midpoint by mid-2026. However, if core living costs remain high, improvements in ordinary households' purchasing power and perceived well-being will still be limited.

- Unemployment rate: 5.2% in Q2 2025, with models pointing to approximately 5.3% in Q3 2025.
- Underutilization rate: 12.8%; number of unemployed persons increased by 11.1% year-on-year.
- Decreased income stability → weakens willingness to take on long-term mortgage commitments.
- Policy dilemma: Weak growth calls for interest rate cuts, while stubborn inflation demands tightening.
- Key indicators: CPI 3.0% (2025Q3), unemployment rate 5.2% (2025Q2), GDP growth 1.5–2.9%, OCR around 2.5%.

- Legal Source: Building and Construction (Small Standalone Dwellings) Amendment Act, passed in October 2025, expected to take effect in Q1 2026.
- Core: Allows ≤70㎡ single-story standalone cottages to be exempt from building permits (original proposal was 60㎡).
- Conditions: Simple design, lightweight structure, simple plumbing; must still comply with the Building Code, executed or supervised by LBP; apply for PIM before construction and submit completion and compliance documents within 20 working days after completion.

Exempting building permits alone is not enough to unleash potential. The government will issue a National Direction under the RMA to exempt eligible granny flats from resource consents (zoning, density, setbacks, etc.), expected to be released by the end of 2025, otherwise local planning could still restrict implementation.

- Homeowners: Multi-generational families, people with disabilities, and rural households gain flexible and economical solutions; save time/costs on traditional permits.
- Construction industry: Forecast of +13,000 units over ten years (approximately 1,300 units annually), benefiting small and medium builders and the prefabricated/modular sector.
- Local councils: Reduced burden on low-risk approvals, but still collect infrastructure fees (for water supply, sewage, transportation) through PIM.
- Shift in responsibility: From council review to homeowner + LBP self-assumption; defects (such as leaks) are primarily pursued between the two parties, emphasizing a 12-month defect period and 10-year implied warranty; the government needs to issue clear guidelines/standard forms/education to reduce non-compliance and safety risks.

The bill's requirements for "simple design/lightweight materials/professional construction" align well with the advantages of off-site manufacturing; standardized prefabricated units are easier to ensure compliance and reduce homeowner risks, thus it is expected that the prefabricated/modular market will see significant catalysis.

- Effective: December 1, 2025.
- Speed limit quota increase:
- Owner-occupiers: The cap on the proportion of new loans with a down payment <20% (LVR>80%) increases from 20%→25%.
- Investors: The cap on the proportion of new loans with a down payment <30% (LVR>70%) increases from 5%→10%.
- Logic: Since July 2024, DTI has become the primary guardrail (owner-occupiers ≤6x, investors ≤7x income), with LVR relegated to a tactical tool; RBNZ assesses that current house prices are in a sustainable range, mortgage growth is moderate, and the proportion of high-risk loans is low, making it suitable to switch to a long-term neutral setting.

- Short-term: Banks have actually issued high LVR loans far below the cap in recent years (due to the combined effect of demand and risk control), so raising the speed limit will not immediately increase loan volumes.
- Long-term: It reserves more space for future upcycles (reaching regulatory "brakes" later), making it more friendly to first-time homebuyers;
- Spillover: Although new residential constructions already enjoy LVR exemptions, relaxing regulatory constraints on core mortgage business can release capital/risk capacity, indirectly improving development financing and sentiment, which benefits project initiation.

- Squirrel's forecast: Early 2026, the one-year fixed rate may reach 3.99%.
- Method: ARIMAX model (using RBNZ data over 8 years), with variables being average cost of bank deposits and 1-year wholesale swap.
- Assumption: OCR drops to 2.25% by November 2025.
- Inference: Marketing psychological pricing + competitive clearing prompts at least one bank to cut first to "grab headlines".
- Mainstream banks (ANZ, ASB, BNZ, Westpac): More conservative, range 4.5–5.0%; taking ANZ as an example: March 2026 ≈4.6%, year-end possibly ≈5.0%.
- Historical school (Infometrics): Referencing 2019, OCR needs to be ≈1.75% and in a downward trend for the one-year fixed rate to break below 4%; believes 2.25% is insufficient to trigger a "3-handle".

- Supporting arguments: Deposit rates falling → funding costs decrease; in a low-growth market, to grab market share, a leading cut may trigger a price war.
- Opposing arguments: Banks need to maintain net interest margin (NIM), coupled with high long-term wholesale rates, limiting the extent of retail rate cuts.
- Impact on borrowers:
- If <4%: Confidence/burden capacity significantly improves, possibly accelerating house price recovery;
- If bottoming at ≈4.5%: Moderate recovery aligns better with fundamentals;
- A temporary "sweet spot" may occur: one-year rates fall while two-year rates remain high (market expects next round of rate hikes), highlighting term selection strategy.

- Synergistic Scenario (Optimistic): If the one-year interest rate is <4%, combined with LVR relaxation, it will encourage homeowners to finance the construction of granny flats, creating a small-scale construction mini-boom, forming a positive feedback for supply and sentiment.
- Conservative/Baseline Scenario: If the interest rate bottoms at ≈4.5%, financing pressure remains, policy adoption rate is limited; high inventory continues to exert pressure on house prices, offsetting some positive factors.

- First-time homebuyers: The window improves, but they need to guard against the risk of 'catching a falling knife' due to income instability/eligibility restrictions and short-term price weakness.
- Investors: High LVR limits double but remain strict, and are constrained by DTI and low rental returns/weak capital appreciation; granny flats provide a new path to increase rental income on existing land.
- Construction industry: Granny flats directly benefit small and medium builders; full industry recovery still depends on the transmission chain of interest rate decline → broader demand → project initiation.
- Existing homeowners: Repricing to lower interest rates can ease cash flow; those with land can use granny flats to increase value/income.

Conclusion: Gradual thawing, not rapid overheating. Policies are supportive but not disruptive: granny flats are incremental supply, LVR relaxation reserves space for cyclical upturns; mortgage interest rates are the decisive variable.
Within the forecast range of 3.99%–≥4.5%, the landing point will dominate affordability/sentiment/policy effectiveness. Under high inventory and cautious sentiment, the buyer's advantage is highly likely to continue in the first half of 2026, with transactions and house prices showing a moderate trend, until broader economic and employment show clear and sustained improvement.

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