NZ likely to see a slower recovery, affecting job growth and debt servicing, but banks and farmers well placed to manage economic shock as housing market remains soft, according to Reserve Bank's latest Financial Stability Report

House prices remain around the top of the Reserve Bank’s estimated sustainable range, and while this suggests the risk of a correction is not particularly elevated, rising mortgage rates could reduce house prices further, the Reserve Bank (RBNZ) says in its latest six-monthly Financial Stability Report.

Released on Tuesday, the report said the housing market generally remains soft with national house prices below their November 2021 peak, having been broadly flat over the past three years.

“Elevated housing inventories are weighing on house prices, particularly in Auckland and Wellington.”

This reflects the soft labour market and low net migration, and is offsetting stronger house price growth in parts of the South Island, the report said.

House prices remain around the top of the RBNZ’s estimated sustainable range, the report said.

“While this suggests the risk of a correction is not particularly elevated, rising mortgage rates could reduce house prices further.”

Lower interest rates easing debt-servicing pressures

Growth in mortgage lending has also been subdued, the report said, with mortgage refinancing between banks elevated for a short period late last year.

“This coincided with mortgage rates being near their lowest point, and a larger-than-normal share of mortgages rolling off fixed-rate terms."

“During this period banks offered new customers up to 1.5% off their mortgage balance as an upfront payment to attract new mortgage business, compared with typical levels of around 0.9%. As a result, nearly three times the usual amount of mortgage debt switched banks in December, while market shares remained largely unchanged afterwards.”

This benefited a small share of borrowers at the expense of banks but the report said it may be offset by generally higher lending margins.

“Assuming no offset from higher margins, we estimate the higher cashback offer cost banks around $100 million, which is a small share of their annual profits before tax of around $10 billion.”

The report said lower interest rates were easing debt-servicing pressures, particularly for households with mortgages and for the commercial property sector.

Risk to financial stability remain higher than in recent years

Global uncertainty and subdued domestic growth have led to risks to financial stability remaining higher than in recent years.

RBNZ Governor Anna Breman said the global risk environment has worsened over the past six months as conflict in the Middle East threatened world energy supply.

Domestically, New Zealand has seen the immediate impacts of the conflict in the Middle East through rising fuel costs for households and businesses,” Breman said.

“High diesel prices are having the most impact on the transport and logistic sectors, as well as primary industries including forestry and fishing,” Breman said.

“While economic growth had been recovering prior to the conflict, we are now likely to see a somewhat slower recovery, affecting job growth and debt servicing.”

The report said ongoing volatility increases the risk of sharp corrections in global asset prices and tighter global funding conditions.

“New Zealand is affected by shocks of this nature through several key channels including trade, uncertainty and financial markets.”

Oil

The report said higher oil prices increase production and transport costs and add to global inflationary pressures.

“An increase in inflation expectations could result in interest rates remaining higher globally for longer. This could lead to tighter financial conditions and weaker economic growth.”

“Softer growth among New Zealand’s trading partners would reduce demand for exports. These effects could be compounded by direct impacts on the approximately 3% of New Zealand’s exports destined for the Middle East,” the report said.

Banks can withstand significant economic shocks

With strong capital and funding buffers, banks are well placed to support customers who may be struggling, the report said.

Banks could also manage stresses in offshore funding markets.

Stress test results showed banks could withstand significant economic shocks including geopolitical events like the conflict in the Middle East.

The report said direct impacts of the Middle East conflict were limited on insurers.

Farmers well placed to manage current shock because of strong export prices

The report said elevated commodity prices have supported incomes across the rural sector.

“The milk payout for the current season is expected to be around $9.70 per kilogram of milk solids (kgMS). With breakeven costs averaging around $8.50 per kgMS, dairy farmers are generally profitable.”

With Fonterra completing the sale of its consumer brands to Lactalis, returning $3.2 billion to shareholders, the report said this was a significant cash injection for most dairy farmers. 

“We anticipate farmers will use a portion of the money to repay debt. This debt repayment would strengthen their balance sheets further, with debt levels having already reduced over the past decade."

But increased fertiliser and fuel costs due to the conflict in the Middle East could reduce farm profits.

“For 2026 autumn, budgets are unlikely to be affected given the price was already locked in. The biggest impact could be in spring later this year.”