NZ housing bubble mostly deflated, but prices may drift lower before stabilizing

New Zealand's housing market has shed most of the excess that built up during the pandemic years, according to analysis from ANZ economists, though prices may still have a modest distance to fall before finding solid ground.

The clearest measure of this correction is the house-price-to-income ratio, a fundamental metric that compares what homes cost against what people earn. Before 2002, this ratio sat around four—meaning the median house cost about four times the median household income. By 2021, at the peak of the bubble, it had climbed to nearly nine. Today it stands at six. That shift reflects two forces working in tandem: house prices have declined while incomes have risen with inflation, squeezing the gap between what homes are worth and what people can afford to pay for them.

But the question that matters most is where this ratio will eventually settle. ANZ economists acknowledge this is genuinely difficult to predict. Before the 2000s, a ratio of three to four was considered the benchmark for affordability. A return to those levels would be transformative for first-time buyers, but the bank's senior economist Matthew Galt argues it is unlikely to happen. New Zealand's ratio has not dipped below five since 2004, and several structural shifts have probably raised the long-term equilibrium. Interest rates are lower now than they were in the 1980s and 1990s, which keeps well-positioned land more expensive relative to incomes. Population growth continues to press on housing demand. Credit availability has expanded. The quality of housing stock has improved. An analysis of 96 English-speaking cities found that while ratios around three were normal in 1990, no city now sits below three, and the median has settled around five.

Other measures of fundamental value tell a more cautious story. The Reserve Bank's sustainable house price indicator, which weighs the long-term benefits of ownership—measured through rents and expected price growth—against the costs of ownership, including interest rates, council rates, and maintenance, still shows prices sitting slightly above where they should be. That gap is sensitive to the neutral interest rate, the theoretical rate at which monetary policy neither stimulates nor restrains the economy, and that figure remains difficult to pin down with precision. What matters in practice is that owning a home has become financially less attractive than renting, and Galt expects that imbalance to persist for the next few years. For both homebuyers and property investors, the math points in the same direction: the incentive to purchase is weaker than average, and that should keep downward pressure on prices.

One bright spot emerges from the price-to-build ratio, which measures how much homes cost relative to what it would cost to construct them. This ratio hit 2.1 at the 2021 peak and has since fallen to 1.54 as of June 2025—the lowest level in a long time. When prices exceed construction costs, developers can profitably build new homes, and that new supply acts as a natural brake on further price increases. Galt notes that construction costs have continued to rise and prices have continued to fall since June, so the ratio has likely compressed even further, suggesting there is only limited room for prices to fall before building becomes uneconomical and prices find a floor.

The scale of the correction already achieved is substantial. Nationwide house prices have fallen 16 percent from the 2021 peak in nominal terms, and more than 30 percent when adjusted for inflation. That magnitude underscores how extreme valuations had become and how difficult the unwinding has been. Yet prices remain slightly elevated relative to what fundamentals suggest, which means they are likely to drift sideways or edge downward for some time before stabilizing. Once they align with fundamentals, Galt expects them to trend upward over the long term at roughly 4 percent per year, moving in line with household income growth and construction costs. Large cycles will almost certainly emerge around that trend—booms when the economy strengthens or long-term interest rates fall, busts when conditions reverse—but the direction over decades should be gradual appreciation.

The path forward hinges on interest rates, the single most consequential variable. If long-term rates trend lower than markets currently expect, today's prices may prove more sustainable than fundamentals now suggest. If rates rise beyond current expectations, prices could face additional downward pressure. Galt and his colleagues expect rates to remain higher than they were through the 2010s, but that expectation itself could shift. The housing market has demonstrated how dramatically prices can move when long-term interest rate expectations change—a lesson written plainly in the gap between the prices that seemed rational five to ten years ago, when rates were expected to stay low indefinitely, and the prices that make sense today.