New Zealand house prices increased in June for the first time in three months, indicating a gradual recovery amid falling interest rates.

According to property consultancy Cotality on Thursday, prices rose by 0.2% from May, when they had slipped by 0.1%. This uptick returned values to their February levels, while the annual decrease of 0.7% marked the smallest drop since September.

Yet New Zealand’s property market remains sluggish despite significant interest rate cuts by the central bank, Bloomberg reports.

The abundance of homes on the market continues to favour buyers, limiting price growth. Additionally, weak economic conditions and increasing unemployment are dampening demand for borrowing. 

“The subdued labour market remains an important factor. It’s not only the direct job losses that are problematic, but a reduction in security for those who have kept their jobs will also be weighing on the property market,” said Kelvin Davidson, chief property economist at Cotality in Wellington.

The number of filled jobs has dropped to levels not seen since early 2023, as global uncertainty prompts employers to be more cautious with hiring. Economists anticipate the unemployment rate will edge up from 5.1% recorded in the first quarter.

Meanwhile, two-year fixed mortgage rates at most local banks have fallen below 5%, the lowest since March 2022, although it's unclear how much further borrowing costs will decrease.

The Reserve Bank of New Zealand (RBNZ) has reduced the Official Cash Rate (OCR) by 225 basis points to 3.25% but removed its explicit easing bias in May. Economists from the country’s four major banks expect the central bank to hold rates steady at its meeting next week. According to swaps data, there is less than a 50% probability that the OCR will drop below 3% this year.

Furthermore, house prices have increased by less than 1% in the six months to June, and Davidson now forecasts a rise of no more than 3% for the full year to December, down from his earlier projection of 5%.

The Reserve Bank of New Zealand, meanwhile, has forecast a 3.5% increase.

“For every upwards influence on the housing market at present, you can probably find a downwards factor,” he said.

“In this environment where buyers have the upper hand and economic sentiment remains subdued, it’s hard to see these flat market conditions suddenly turning around within a month or two.”