Inflation blow raises spectre of early interest rate rise - but how soon?

1. News of inflation’s death has been greatly exaggerated

The biggest housing market news was the uptick in inflation, which was concerning – coming in at 3.1%, up from the trough of 2.2% in the second half of 2024 and the highest since Q2 2024. Perhaps most importantly, though, it was a touch above the Reserve Bank's 1-3% target band. Problematic items in Q4 included electricity and local council rates.

It’s clearly not an ideal result. But even though the economy is recovering, there’s still spare capacity, which should bring inflation down again once the usual lags have been given time to work. It doesn’t necessarily mean the Reserve Bank will hike the OCR in the next few months, but it may do so later this year rather than early 2027.

2. First-home buyers continue to dominate

The Cotality Buyer Classification data for December confirmed yet more strength for first-home buyers. Their share of property purchases for the quarter was 28.4%, surpassing the previous high of 27.6% for a quarter - set just three months earlier. Moreover, for 2025 as a whole, first-home buyers accounted for 27% of the market - a touch higher than movers (i.e. relocating owner-occupiers) and above mortgaged multiple property owners. In addition, the number of first-time purchases hit 4-5-year highs.

Clearly, lower mortgage rates and reduced house prices are helping first-home buyers, alongside a good choice of listings and access to KiwiSaver for at least part of the deposit. Speaking of deposits, still around half of first-home buyers get into the market without 20% equity via the low-deposit lending allowances at the banks. It’s also worth noting that in some cases, first-home buyers will also be saving money servicing a loan compared to paying rent (albeit ownership comes with other costs).

Will first-home buyers continue to dominate in 2026? In market share terms, clearly the sum must always be 100%, and with investors coming back and movers potentially poised to return, first-home buyers' high share may not stay high forever. But even then, you can still have a higher number of first-time buyers in a busier overall market (even if their share drops), and with KiwiSaver, the LVR speed limits, and low mortgage rates all still in play, conditions look set to be favourable for new buyers for a while yet.

Cotality chief economist Kelvin Davidson: "For 2025 as a whole, first-home buyers accounted for 27% of the market." Photo / Peter Meecham

3. Services sector activity finally rises

Meanwhile, this is not necessarily directly related to day-to-day property matters, but it was still of huge note that, after 21 months of falling activity, the BNZ-BusinessNZ Performance of Services Index finally showed an increase in December. To be fair, after that string of declines, the level of activity will still be fairly low. But it still adds to a range of other strengthening economic data.

4. Is the migration cycle finally turning?

Stats NZ reported last week that net migration totalled 10,680 in the year to November, well down on the cyclical peak (>135,000) and even the long-term average (circa 31,000) – but up from what might prove to have been the trough of less than 9000 in August. Granted, it’s early days, and these figures can be revised significantly. But the cycle does seem to be turning, as departures just ease back a bit and arrivals pick up – maybe as fewer Kiwis look to head to Australia and more people from other countries see us more favourably as our economy improves.

Landlords would certainly be one group hoping for more migration (and rental property demand), given the recent weakness of rents.

5. Watching bank switching, LVRs, and DTIs

On Thursday, the Reserve Bank will publish mortgage activity data for December. Alongside the usual headline lending flow and the splits by interest-only vs principal repayment and by high vs low DTI, there are two other really intriguing elements to this release – did the 1.5% cashbacks in November trigger a surge in bank switching? And did the easing in the LVR rules from December 1 lead to any shift in this lending activity? Based on my recent discussions on the ground, the answer to the first question is likely to be a strong yes, with only a tentative yes for the second.

- Kelvin Davidson is chief economist at property insights firm Cotality