Economists are beginning to flirt with a revolutionary idea - that the New Zealand economy might be able to grow and prosper without the traditional leg-up from the housing market

All the while we've been waiting for this mooted economic recovery to arrive, something has been missing. And it's a biggie.

Where's the booming housing market?

Come on, this is New Zealand! We don't do booming economy without booming housing market! 

Or, we haven't, till now. 

But as the housing market remains missing in action, and with the Reserve Bank (RBNZ) having flown the white flag on it for this year, forecasting exactly zero movement in house prices for calendar year 2026, then so the logic is being entertained that maybe this time we don't need the houses.

The RBNZ itself has discussed this topic a fair bit in recent months - as its previous expectations that the housing market would start to turn up have not materialised.

In a recent interview with interest.co.nz, RBNZ chief economist Paul Conway noted that house prices are normally the “kicker” for household spending in New Zealand.

"This is called the wealth effect. The value of your house goes up if you’re in the fortunate situation of owning your house. And you feel wealthy so you’re more likely to go out for dinner, that kind of thing.”

But that's not happening, "which is quite a change for the New Zealand economy".

Instead, Conway says the RBNZ sees the growth coming through the labour market.

“More security for workers in their jobs, lower unemployment, more people entering the labour market.”

Conway says if we can increase our productivity then wages would go up as well.

“That’s going to provide more of an impetus for households to increase their spending than it has in the past, relative to house prices.”

ASB’s latest Investor Confidence Survey for the fourth quarter to December 31 2025,indicates "a shift in New Zealanders’ perceptions of where the strongest investment returns lie". For the first time in years ASB says, owning your own home or having a property investment are no longer seen as providing the best returns on balance among those surveyed.

Instead, KiwiSaver and managed funds have emerged as the top two performers in the eyes of investors, reflecting growing confidence in diversified and professionally managed investment options.

ASB senior economist Chris Tennent-Brown says while property has long been considered the gold standard for investment, "Kiwi are increasingly recognising the value and convenience of managed funds and the long-term benefits of KiwiSaver, favouring the flexibility and potential for growth".

Westpac senior economist Michael Gordon, in a commentary titled: 'The Houseless Recovery?' says that in presenting the Westpac economists' latest quarterly Economic Overview, the most common piece of feedback has been a degree of scepticism about their [the economists'] view that the New Zealand economy can recover without a meaningful lift-off in house prices.

A break from history

"This scepticism is understandable, as it would be something of a break from history. But there is a plausible mechanism for how this could happen, and indeed the evidence suggests that we’re already on that path, though it’s still early days," Gordon says. 

He says what the sceptics have in mind is the 'housing wealth effect', where people tend to be more willing to spend when the value of their houses is rising. That doesn’t necessarily mean that they are using the house as an ATM (and these days, loan-to-value restrictions may limit their ability to do so). Rather, they’re more inclined to spend out of their incomes if they believe that the house is doing the saving for them. 

"We’ve noted in the past that there has historically been a strong relationship between housing wealth and household spending in New Zealand, and arguably stronger here than in other developed economies. But the relationship doesn’t hold all of the time, and especially not in more recent years, as Covid and the subsequent policy responses have led to significant volatility in both house prices and consumption," he says. 

The housing wealth effect is considered to be an important channel of transmission for monetary policy, Gordon says. Lowering interest rates drives up house prices, which leads to more household spending, which boosts activity and employment, which ultimately leads to higher inflation (and vice versa).

"So, the lack of a house price response over the last couple of years, through what appears to be a now-completed easing cycle, is quite unusual." 

But this doesn’t mean that monetary policy hasn’t been getting traction though, Gordon says. And he notes that retail sales volumes rose by 0.9% in the December quarter - ahead of the 0.6% increase that the Westpac economists expected. "After having consistently fallen through 2022-24, real retail spending has now risen for five straight quarters." 

But Gordon says while the lift in spending to date has been encouraging, can we really be confident that it will carry on without the backing of the housing wealth effect?

"We’re forecasting just a 4% rise in house prices over 2026, and even that would put us at the higher end of market forecasts. The RBNZ assumed that house prices would be flat for 2026 in its February Monetary Policy Statement." 

The income-expectations effect

But he says more recent economics literature offers a solution.

"There is growing support for the idea that what we call the housing wealth effect is actually an income-expectations effect. When people expect a rise in their future incomes, they tend to both spend more and to bid house prices higher. The magnitude of the effect on house prices will depend on how responsive the supply side is – historically New Zealand’s housing supply has been fairly unresponsive, but there are signs that this is improving. 

"The challenge for us is that we can’t directly observe people’s income expectations – so in the past we’ve used house prices as a proxy. That has generally served us well for the purposes of forecasting household spending, without necessarily requiring a causal relationship. That proxy may not serve us as well in the future, if the efforts to improve the responsiveness of the housing supply bear fruit," Gordon says. 

All of this is not to say that housing wealth effects don’t exist, he says.

"But their impact may be in amplifying the economic cycle, rather than being an essential driver of it. We feel that our household spending forecasts have been suitably tempered to match our view on house prices – 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."