Chris Lee & Partners Ltd

Market News - 7 September 2026

Higher rates, weaker households and the warning hidden in the Reserve Bank’s forecasts

Most New Zealanders will have seen the headline this week that the Reserve Bank increased the Official Cash Rate by 0.25% to 2.75%, however far fewer will actually read the Monetary Policy Statement explaining why.

When preparing the Policy Statement, The Reserve Bank describes an economy with two different stories running at the same time, rather than just that inflation is too high and therefore interest rates must rise. 

It states that the export economy is performing well, supported by high commodity prices and the recovery of tourism. Many regional economies are benefiting from export income, while several of our larger infrastructure and electricity businesses are investing heavily.

However, the other story is that the domestic household economy is struggling. Unemployment is 5.6%, wage growth is low, house prices remain weak, household consumption is slowing and residential construction has struggled.

Into that environment has come another inflation shock from overseas.

Annual inflation rose from 3.1% in March to 4.1% in June, well above the Reserve Bank's 1% to 3% target range. 

Most of the sudden increase in inflation has come from fuel prices. However if you strip fuel out of the CPI then annual inflation actually fell to 2.9% as most measures of core inflation remain well inside the Reserve Bank's target range.

So why increase the OCR if most measures remain inside the target range? 

Its concern is the second-round effects.

A rise in petrol prices initially affects motorists directly. But fuel is also an input into farming, freight, aviation, construction, manufacturing and almost every supply chain, so eventually the rise in petrol will find their way into fertiliser, plastics, transport, food and other goods.

If businesses simply absorb those costs, the inflation shock eventually passes.

If businesses increase prices, employees then demand higher wages to compensate for their higher living costs, and businesses increase prices again to recover those wages. A temporary overseas shock can become persistent domestic inflation.

The wage price spiral dilemma follows!

That is what the Reserve Bank is trying to prevent.

Four of the six committee members believe inflation risks are now tilted to the upside. They are particularly concerned that recent high inflation could influence businesses' pricing decisions and that companies may increase prices by more than their additional import costs require.

The Reserve Bank has therefore concluded that it should begin gradually removing monetary stimulus and has changed the outlook for the OCR to gradually increase to around 3.2% over the next two years.

So another increase to 3.00% now looks likely, however a subsequent move to 3.25% is merely possible, although we think that decision will be much harder to justify unless domestic inflation proves more persistent than currently expected.

Financial markets had already begun reaching much the same conclusion. Before this week's decision, market pricing had shifted to imply an OCR of around 3.00% by the end of this year.

The reason we would be cautious about assuming a much larger tightening cycle is the other side of the story in the Reserve Bank's statement in that the New Zealand economy is not overheating.

The Bank assumes GDP was essentially unchanged during the June quarter. It expects growth to have resumed during the September quarter, forecasting quarterly growth of around 0.5%, but the recovery remains uneven.

Unemployment has increased to 5.6%, and the Reserve Bank believes there is still substantial spare capacity in the labour market.

Wage inflation was between 1.7% and 2.0% in the June quarter, which hardly points to an inflationary wage boom. At the same time, households have continued to spend cautiously.

So, if we do not have a wage boom and household consumption remains subdued, there is a real risk of significantly harming the domestic economy if we get this wrong.

That caution is also reflected in household finances. The household saving rate has risen, consumption has grown more slowly than incomes, and falling house prices have weakened household wealth. The Reserve Bank specifically notes that previous reductions in interest rates did not produce the usual corresponding increase in housing wealth and household spending.

This is where the latest interest rate decision becomes more concerning.

Higher interest rates are bad news for home borrowers.

Many households entered 2026 expecting mortgage rates to remain stable. Instead, rates have risen, mortgage rates have begun responding and the Reserve Bank is now signalling that the OCR itself is likely to rise further.

For a household with a large mortgage, even relatively small changes matter.

An additional 0.50% interest cost on a $500,000 mortgage is $2,500 a year before allowing for principal repayments. That money has to come from somewhere. It generally comes from reduced discretionary spending.

There is also little reason at present to assume that house prices are about to rise.

National house prices remain below their November 2021 peak and have been broadly flat to lower for approximately three years. Housing inventories are elevated, particularly in Auckland and Wellington, and the Bank explicitly acknowledged that rising mortgage rates could push house prices lower.

That creates a difficult problem for recent first-home buyers.

RNZ reported this week that it estimates approximately 4,000 first-home buyers now owe more than their homes are worth. 

One couple described their position as having effectively lost half of their deposit.

Negative equity does not necessarily mean someone will lose their home. As long as a household can continue making its mortgage payments and does not need to sell, it can remain in the property and wait for values to recover.

The difficulty is that negative equity removes options.

A household may be unable to sell without crystallising a loss. Moving for employment becomes harder. Refinancing with another bank becomes more difficult. Borrowing against the property may be virtually impossible.

Banks also become understandably uncomfortable as gearing approaches 100%.

The equity contributed by the borrower provides the bank with an important buffer if the property ultimately has to be sold. This is also a key reason why the Reserve Bank imposes loan-to-value restrictions on banks, as they provide protection against falling house prices and financial distress.

Some recent purchasers may have done everything that was expected of them. They saved a deposit, secured employment, passed a bank’s servicing tests and bought a home.

Yet they could still find themselves with virtually no equity simply because the property market moved against them.

Wellington deserves particular attention.

Homeowners are already dealing with weak property prices and a labour market affected by the reduction in government employment. They are now receiving ridiculously high Tiaki Wai water bills.

The average water bill across Wellington this year is $3,000 - $4,000, although the actual amount varies according to location and property value.

Some households with higher-value properties will pay substantially more.

Councils have removed a small portion of this from home owners rates bill, however, the underlying cost is still increasing as Tiaki Wai decided that the average water services bill will increase by 13.3%, and it has warned that charges will continue to rise as it wants to do a lot of the work now, rather than spread the work over decades.

That adds another pressure to household budgets already absorbing mortgages, insurance, rates, food and energy costs.

There is also political risk.

The Opportunity Party has proposed an annual land value tax and openly states that one of its sole intended consequences is to lower property prices by up to 15%.

That policy is not government policy today, but if a future government required TOP support, then a land value tax could form part of that agreement. So homeowners would have to consider another potentially significant change to property valuations, resulting in significant harm to households.

That becomes particularly important when households are highly geared.

Imagine someone bought a $900,000 house three years ago using a $90,000 deposit.

They began with 10% equity.

If the property has since fallen 10% in value, their entire original equity has effectively disappeared.

As mortgage costs rise and additional expenses such as rates and water bills pile up, further falls in house prices can make the position even more difficult. Eventually, the mortgage could exceed the value of the property, leaving the bank with little or no equity buffer and the borrower facing low-equity margins and potentially higher mortgage rates.

The financial position of the borrower can therefore become increasingly uncomfortable, even though they may still be perfectly capable of meeting their monthly mortgage payments.

But households under that kind of pressure are likely to become more cautious, and spending will slow.

This is why falling house prices should not be discussed as though there are no consequences.

Making housing more affordable for future buyers is desirable, but ideally that should occur through increased housing supply rather than through higher household costs or policies that deliberately erode existing household wealth.

Destroying the equity of people who have only recently bought their first home is something quite different, and it has wider economic consequences.

Housing is the largest asset owned by most New Zealand households. When people believe their wealth is increasing, they generally feel more comfortable spending. When mortgage costs are rising while the value of their home is falling, they tend to do the opposite.

They save.

That appears to be happening already.

The Reserve Bank says household consumption remains weak and saving has increased as households respond to job uncertainty, subdued confidence and declining real wealth.

This creates a feedback loop that investors should understand.

Higher interest rates weaken housing demand. Weak housing demand restrains house prices. Falling house prices reduce household wealth. Lower household wealth suppresses spending. Lower spending hurts domestic businesses. Weaker businesses employ fewer people. Employment uncertainty then makes households even more cautious.

It is one reason we think the Reserve Bank will need to be careful about increasing the OCR too far. If that were combined with government policies that imposed further costs on property owners, such as a land tax, it could become the straw that breaks the spirit for some households.

Interestingly, this same economic story has been appearing in the recent stream of NZX company announcements.

Look first at electricity and infrastructure.

Genesis Energy increased normalised earnings by 11% to $522 million and operating free cash flow by 24% to $322 million.

Contact Energy completed the Manawa acquisition, commissioned its first 100MW battery, commenced construction of another 200MW battery and continued investing across geothermal, solar and wind generation.

Vector reported adjusted earnings of $482 million and invested a record $544 million, much of it into Auckland's electricity network.

Chorus continues to benefit from the structural migration to fibre. Its total fibre connections increased to 1.147 million during the June quarter, while copper connections continue their long decline.

These businesses are not immune from higher interest rates, particularly because infrastructure requires large amounts of capital.

But their demand is relatively defensive.

Households may delay replacing a car, buying furniture or renovating a kitchen. They generally do not stop using electricity, broadband or essential infrastructure.

Compare that with some of the businesses more exposed to the economic cycle.

Freightways said conditions became more difficult in the second half of its financial year and management specifically warned about higher fuel costs causing softer customer demand.

Air New Zealand provides an even clearer illustration of the inflation shock.

Revenue actually increased 3.9% to $7.0 billion, yet the airline recorded a $336 million loss before tax, mainly caused by higher fuel prices, engine availability problems, maintenance expenses and aviation system costs overwhelmed the benefit of increasing passenger revenue.

This is exactly the problem the Reserve Bank is discussing.

Air New Zealand cannot control international oil prices. It must either absorb higher costs, reduce other expenditure or eventually recover more of those costs through passenger fares.

Property companies sit on another fault line.

Precinct Properties maintained occupancy at 97% yet its property portfolio lost $110 million.

That demonstrates how higher interest rates can affect an asset even when its underlying operations remain sound.

When investors can receive higher returns from bonds and bank deposits, the yield required from property also rises. Higher required yields generally translate into lower property valuations.

Fletcher Building's recent trading updates also show a recovery which is still fragile. The company warned that uncertainty around input costs was delaying or cancelling some new projects, particularly in commercial construction.

Summerset's first-half result was more encouraging. Total sales increased 17% and cash generation improved significantly, whilst management itself described market conditions as uneven.

Uneven.

That is probably the best description of the New Zealand economy today.

We do not have an economy collapsing into recession, nor do we have an economy booming strongly enough to make aggressive interest rate increases an obvious decision.

We have strong exporters, improving regional incomes, major electricity investment and infrastructure businesses generating dependable cash flows.

At the same time, we have unemployment of 5.6%, weak housing, cautious consumers, subdued wage growth and heavily indebted households facing the prospect of higher mortgage rates.

The Reserve Bank's problem is that imported inflation has arrived before that domestic recovery has properly taken hold.

Its central forecast says the OCR needs to rise gradually towards approximately 3.2%.

We think 3.00% is increasingly likely.

After that, the argument becomes much less clear.

If businesses begin passing higher fuel costs aggressively through the economy, wage demands accelerate and inflation expectations increase, the Reserve Bank will have little choice but to continue tightening.

If unemployment remains elevated, households remain cautious, house prices continue to struggle and underlying inflation keeps moving towards 2%, the case for considerably higher rates becomes weaker.

Investors should therefore watch more than the headline CPI number. Watch wage growth, unemployment, house prices and household spending.

And perhaps most importantly, watch what companies themselves are saying.

The NZX reporting season is giving us a real-time picture of the economy that sits underneath the official statistics.

Electricity, essential infrastructure and export income remain areas of relative strength.

Property, construction, transport and consumer-sensitive businesses face a much harder environment.

For households with large mortgages, the message is less comfortable.

Interest rates may remain higher for longer, house prices may struggle to provide the capital gains many New Zealanders became accustomed to, and property-related costs will continue to rise.

For some recent first-home buyers, that combination has already resulted in negative equity. That does not mean a housing crisis is inevitable, but it does mean policymakers should understand that there is a limit to how much additional pressure highly indebted households can absorb.

The Reserve Bank is trying to stop an overseas inflation shock becoming embedded in New Zealand but it must now do so without turning a fragile household recovery into the next economic problem.

Christchurch & Auckland Seminars

Following our recent investor seminar at Southward Car Museum in Paraparaumu, we are pleased to confirm that we will be holding our last two seminars in Christchurch and Auckland.

The seminars are open to both existing clients, friends, families this year and other investors.

The Christchurch seminar will be held at Burnside Bowling Club at 11:00am on Thursday, 17 September.

The Auckland seminar will be held at Fairway Events Centre, North Shore, at 11:00am on Wednesday, 23 September.

We will discuss the current investment environment, recent developments across New Zealand and international markets, risk management, and some of the companies and sectors we are currently watching closely.

If you would like to attend either of these seminars, please contact us by email to reserve a place.

Bond issues

BNZ Bank is has announced a new five-year senior fixed rate note. We expect the offer to have an interest rate of approximately 4.75% per annum. 

Please note that BNZ will not be paying the transaction costs for this offer. Accordingly, brokerage will be charged.

This offer is open now, and closes at 10am on Thursday, 10 September.

If you would like a FIRM allocation, please contact us with your CSN and an amount, and we will email you a contract note on Thursday.

Metlifecare may open a new senior secured bond in late September. We expect the bond to have a term of between 5 and 7 years, with an interest rate of at least 5.50% per annum.

Contact Energy is expected to issue a new subordinated capital bond in October. We expect the bond to have a term of around 6 years, with an interest rate of at least 5.50% per annum.

Investors who may be interested in these potential bonds are welcome to contact us with their CSN and an indication of the amount they may wish to invest. We will then contact them once the final terms and further details are available.

Travel

Our advisors have an extensive travel schedule coming up over the next quarter, including the following dates:

16 September – Christchurch – Chris Lee18 September - Christchurch (AM only) – Chris Lee22 September – Lower Hutt – David & Gavin24 September – Ellerslie, Auckland – Chris Lee25 September – Ellerslie, Auckland (AM only) – Chris Lee25 September – Palmerston North – David & Gavin5 October – Napier (Havelock North) – Edward Lee5 October – Nelson – Chris Lee6 October – Napier (Mission Estate) – Edward Lee6 October – Blenheim – Chris Lee9 October – Wellington – Gavin Parkes21 October – Auckland (Albany) – Edward Lee22 October – Auckland (Ellerslie) – Edward Lee

On top of these areas, we will also visit Christchurch, Wellington and Lower Hutt in November. Dates to be confirmed.

Please contact us if you would like us to visit your area or would like an appointment.

Edward Lee

Chris Lee & Partners Limited

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