Sharply weaker confidence, employment and GDP growth will drive weakness in the housing market, Westpac economists say

Westpac economists are now forecasting an outright fall in house prices in New Zealand this year, along with higher unemployment, inflation over 4% and lower GDP growth.

The fast developing Middle East crisis has all the economists sharpening their pencils in order to try to assess the impacts on New Zealand.

In an Economic Bulletin, Westpac chief economist Kelly Eckhold and senior economists Michael Gordon, Darren Gibbs and Satish Ranchhod have laid out their new economic forecasts.

These are the key points as outlined by the economists:

• We have increased our assumptions of where oil and especially refined product prices will peak. But we still (optimistically) assume that oil market disruptions ease in around a month’s time and prices fall gradually from there.

• We now see a hole in economic growth in the middle of 2026, with a recovery from the second half of the year. Growth for 2026 is revised down to 1.9%.

• The labour market will again be weak through the middle of the year, with unemployment peaking at 5.6% and ending 2026 at 5.4%. This will crimp the recovery in household spending and the housing market.

• House prices are now expected to fall by around 0.9% over 2026. Sharply weaker confidence, employment and GDP growth will drive that weakness.

• Higher energy prices imply another significant upward revision to our inflation forecast, which is now expected to peak at 4.1%. Inflation is set to linger well above the levels the RBNZ [Reserve Bank] had previously assumed for all of 2026.

• We continue to see the Official Cash Rate as on hold until late this year. While inflation will lift in 2026, it will reverse course in 2027. In the interim, excess capacity in the economy will grow.

Specifically on house prices, the economists (who had previously forecast a rise of about 4% this year) say house price growth has already been muted in recent months.

Buyers likely to step back

"And in the wake of the Middle East conflict, recent weeks have seen a lift in global bond rates, along with related upward pressure on local mortgage rates. Combined with a downturn in economic growth and a weaker labour market, that’s likely to see buyers stepping back from the market," they say.

"Further ahead, we expect a return to more moderate rates of house price growth."

The economists' new 1.9% forecast for GDP growth over 2026  is down from 2.8% previously.

"In the very near term, we’ve pencilled in a fall in quarterly GDP of 0.4% in the June quarter. That’s mainly due to an expected drop in household spending in response to increases in living costs and related falls in consumer confidence. Those headwinds will not be significantly offset by the Government’s support package targeting lower income households."

On unemployment, the economists say with a softer outlook for economic growth, businesses are likely to remain cautious about taking on new staff, and some firms may shed workers.

"With weakness in activity and the jobs market, the overall level of wage inflation is expected to remain moderate in the near term (though some workers with specialised skills may be able to negotiate larger pay increases in response to the rise in living costs). Longer term, as the economy recovers, we may see demands for larger costof-living adjustments to wages as workers try to claw back the loss in their purchasing power."

Inflation to remain above 3% all year

The Westpac economists now expect that inflation will peak at 4.1% in mid-2026, and that it will remain above 3% through the first quarter of 2027.

"That is up sharply from our previous forecasts, which assumed a peak in inflation of around 3.2%. Importantly, inflation is set to linger well above the levels the RBNZ had previously assumed for all of 2026," they say.

"When oil prices do eventually drop back, inflation is expected to fall to levels that are lower than we previously assumed (a pattern that is often seen in the wake of oil price spikes). In our updated projections, inflation is expected to briefly dip below 2% in late-2027, before rising back up to around 2.3% further ahead."

The economists say that should oil prices fall back more rapidly than they’ve assumed, we’re still likely to see inflation lingering above 3% this year. That’s due to the lift in fuel prices that have already occurred and related impacts on cost of production.

"The impact of some disruptions to supply chains will take several months to resolve even if oil prices drop faster than we’ve assumed."

RBNZ will stay on hold

However, the economists expect that even with a significant near-term rise in inflation, the RBNZ will keep the OCR (currently at 2.25%) on hold until the end of this year. That’s in contrast to market pricing, which is consistent with rate hikes beginning in July, and at least two hikes before year’s end.

"However, there are larger questions around the longer term outlook for policy, and we do expect that the RBNZ will begin to hike the OCR from the December quarter. When the shock passes and spare capacity begins to be eroded, we do see a risk that businesses will attempt to rebuild margins. There could also be demands for larger cost-of-living adjustments to wages if petrol and other prices settle noticeably above pre-shock levels.

"That upside risk for longer term inflation expectations and price setting behaviour is a key risk that Governor [Anna] Breman highlighted in her speech [on Tuesday]. As a result, surveys and other evidence of pricing behaviour will warrant close attention over the coming months."