Robust recovery tipped by Kiwibank
Lower interest rates are doing their job. The medicine is working, Kiwibank says.
Monday, December 15th 2025, 6:06PM
by Sally Lindsay
Kiwibank has been the most vocal of the main banks in advocating for interest rates to get to stimulatory territory. It now believes the settings are right and having an impact.
It says a robust economic recovery is taking hold as those cuts finally persuade consumers to loosen the purse strings.
Kiwibank chief economist Jarrod Kerr says the recent stream of data is pointing to strong improvement in economic output over the third quarter of this year and showing signs of recovery, particularly across the interest rate sensitive sectors if the economy.
The most recent release of good news came from Stats NZ’s building activity data. The volume of building activity is up 1.5% over the quarter, well above the 0.2% lift expected by markets.
Boosting growth is the 2.8% uptick in residential volumes, but non-residential building activity, is down 1.3% over the quarter, marking the fifth consecutive quarter of declines for the sector.
Altogether, building activity appears to have found a floor. And looking at building consents, a leading indicator for activity, a pickup in construction appears imminent.
Consents remain around 25% below from their 2022 highs but have been on a general upswing since the middle of the year.
The fall in interest rates over the year as well as the anticipation of a recovery in the housing market likely underpins the lift.
Kiwibank expects house prices to rise about 2-3% next year. "That's not exactly shooting the lights out, but it is an improvement from trekking sideways over the past two years."
It also noted data showing Kiwis making the largest retail spend since late 2021, suggesting there was “more fun, discretionary spending” taking place.
RBNZ on the hook
However, Kiwibank says the RBNZ is "at the centre of some confusion" over interest rates.
After its November Monetary Policy Statement (MPS) indicating the OCR easing cycle might be at an end, wholesale interest rates lifted rais¬ing bank fund¬ing costs and Westpac and the Co-Operative Bank increased some long-term interest rates.
Financial markets are now factoring in rate hikes and not cuts early next year.
Kiwibank’s economists say the RBNZ’s misstep "is all too familiar".
"Over the past few years, the Reserve Bank has bounced around from being hawkish in November, dovish in February, hawkish in May and then dovish in August. There seems to be some seasonality to its mishaps.
“The miscommunication in November, along with climbing wholesale rates and higher retail lending rates, suggest we may indeed get another dovish commentary in February, they say.
"It's silly, we know. At the end of the day, retail rates are in a lower bound, although not as low as they should be.
"The Reserve Bank can - and should - lower wholesale rates with the stroke of a pen in February or from a speech at any time."
Plenty of competition
Meanwhile Squirrel Mortgages founder John Bolton while this year has been one of big ups and downs and change across interest rates, the housing market, and the economy, next year is shaping up to be a year of more stability.
Interest rate falls are probably done and dusted, he says.
Even though there’s plenty of competition playing out between the banks, it is all happening in the cashback space.
Banks are offering 1.50% cashbacks on all new loans approved before 16 December (including refinances and new property purchases).
“Banks like cashbacks because experience has taught them that the promise of cash in hand is a lot more effective at winning new customers than rate discounts and it also means they’re only competing for that really price-sensitive portion of the market, rather than across their whole mortgage book, which is a win for their bottom line,” Bolton says.
“While it’s a sweet deal for anyone who’s eligible, it doesn’t leave a whole lot of room (margin-wise) for lenders to go out and compete on rates as well.”
As such, there has next to no movement in fixed-term rates, apart from Westpac and the Co-Operative Banks lifting their long-term rates slightly in response to spiking wholesale rates.
Bolton says it’s yet another clear sign that we’re very much at the bottom of the cycle, meaning the banks are now intent on protecting their margins at all costs.
It means the chances of the one-year rate getting down to 3.99% now feel like an extremely long shot.
With the best one-year rate sitting at 4.49%, and some sub-5% options still remaining for borrowers looking to fix longer-term, he says that’s about as good as things are going to get.
“At any other time, the interest rate falls we’ve had over the past 18 months (down 3% from peak) would’ve lit a match under house prices and sent them skyrocketing again. While some parts of the market, such as Canterbury, have gone from strength to strength, main centres like Auckland and Wellington have experienced further falls this year.”
Prices are probably up 0.50% on average across the country, which is about as close to flat as it gets, he says.
“After the rollercoaster ride of the past few years, we’re heading into 2026 with what feels like a good level of balance in the housing equation.”
Build levels have remained relatively high despite this latest recession, especially compared to the GFC.
The cost of construction has come down significantly, which will help to keep prices under control. Construction costs are running at about $2,500/m2, which haven’t been seen in about a decade, Bolton says.
“We’ve also got a government set on increasing land availability for housing – ensuring supply better matches demand – through a number of reforms, including the latest proposed changes to the RMA.
And helping to keep demand in check is Kiwi borrowers gorged on debt during the interest rate lows of the pandemic, and are still up to their eyeballs in it and immigration is still flat.
“The net result of all of that is house price growth is going to be much more aligned with income growth.”
House prices should increase somewhere about 3% next year, he says. Beyond that growth of 5% could be expected each year, but the days of house prices doubling every decade are over.
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