Why were house price forecasts for this year so wrong?

Activity picked up, but values were mostly flat. Photo / RNZ, Nate McKinnon

By Susan Edmunnds of RNZ

Even roughly three months out from the end of it, it is pretty safe to say that in 2025, house prices barely moved.

Activity picked up, but values were mostly flat.

That has probably come as a surprise to those who started the year expecting significant price growth. ASB at one point thought prices could lift 10%.

Westpac chief economist Kelly Eckhold said he had forecast 7% at the start of 2025. He now expects prices to increase just 0.6% this year.

“We’ve had no meaningful price appreciation for three months now so we have to be a bit realistic about what we can expect.

“We are going into the spring selling season, so it’d be reasonable to think that there will be an increase in activity this side of Christmas. But yeah, hard to imagine that it’ll be very much more than what we’ve been seeing over most of this year.”

He said he had expected the impact of falling interest rates to be more noticeable, and for the economy to be stronger.

“Yesterday we put out our GDP forecast for the second quarter, and we’ve got it at minus 0.4. I mean, really, at the start of this year, when we had 0.8 for the first quarter, we’d had a positive number for the fourth quarter last year.

“I think our forecasts were really envisaging that in the middle of this year we would have had another decent positive number, and that is not really the case.”

He said he expected prices to grow 5.4% next year.

“We are still expecting that lower interest rates are still going to translate into a recovery in house prices. I mean, a 5% house price increase is a bit below average, really, I suppose, if we look at the last sort of like 10 or 15 years, and it is certainly quite a lot weaker than some of the really strong levels of growth that we had post GFC. So, there is that.

“I mean, we do generally expect that the economy will be operating closer to a trend next year as well. And it would be very unusual, I think, for house prices to be not rising in nominal terms if that was to occur.”

Gareth Kiernan, chief forecaster for Infometrics, said his most recent forecast was for a 2% fall in prices next year. But he said it was possible that could be revised upwards next month.

“The official cash rate is now almost certain to go down to 2.5% and hold at that level throughout most of 2026, rather than our previous expected low of 3%. The flow-on effects into mortgage rates and debt-servicing costs are likely to draw a few more buyers into the market than we had previously been forecasting.

Gareth Kiernan. Photo / RNZ, Rebekah Parsons-King

“House prices are also underperforming our already modest expectations for 2025. The difference is reasonably marginal, but if prices are flat this year, rather than rising 2%, the lower starting point for 2026 implies better affordability and less downward pressure on prices relative to previous expectations.”

He said there were two main reasons why forecasts for this year had proved too high.

“People had anticipated that falling mortgage rates would have more of a stimulatory effect on the housing market than has been the case. Instead, we’ve seen factors such as slowing net migration, difficult labour market conditions, sluggish consumer confidence, and poor housing affordability weigh on buyer numbers, leading to a lack of house price growth.

“The experience of the last 30 years is that New Zealand’s economic cycle has largely coincided with the housing market’s performance and, in particular, upturns have been led by a stronger housing market.

“Thus, the hoped-for economic recovery during 2025 was expected to coincide with faster house price growth. However, a missing factor this year has been increasing net migration - hence the housing market outcome, the delayed nature of the recovery, and the mixed messages from the Government about whether they want house prices rising modestly or falling.”

He said the economic recovery would need to be led by the provinces, with increased export income flowing through to more economic activity. That was the experience of cycles up to the early 1990s, he said.

“In contrast, the cycles over the last 30 years have largely been driven by higher net migration, leading to a strong housing market and economic performance in Auckland, which then radiates throughout the rest of the country.

“New Zealanders have become so used to this dynamic that they find it hard to imagine an economic upturn that does not have rapidly rising house prices as part of the mix.”

Kelvin Davidson. Photo / Supplied

Kelvin Davidson, chief economist at Cotality, said he did not formally forecast house price movements but had expected a 5% increase this year.

“But the ‘conflicting forces’ have stayed in play longer than might have been thought, with the labour market in particular continuing to offset house price effects of lower mortgage rates.

“However, we’re now starting to see some shifts…. affordability a little more normal, listings on the market dropping, lower mortgage rates flowing through to existing borrowers as they roll over, and unemployment set to drop a bit early next year… the 5% increase has probably been delayed a year.”

-RNZ