Does a weaker NZ dollar make homes easier to sell? The test facing New Zealand’s construction recovery

The NZ dollar has fallen yet again.

Recently, discussion on social media about the NZ dollar’s exchange rate against the renminbi has heated up again, with some even describing it as having “fallen into the 3.5 range”. The precise rate still needs to be verified, but for Chinese New Zealanders preparing to visit family in China, send money to relatives or buy goods from China, the same amount of NZ dollars now buys less.

Conversely, people holding renminbi can exchange it for more NZ dollars. This raises a familiar question: with New Zealand homes now cheaper in foreign-currency terms, will they become easier to sell?

Not necessarily. A more favourable exchange rate does not guarantee increased demand for homes. Local households’ wages, living expenses and mortgages are still calculated in NZ dollars; builders, meanwhile, may find that imported materials and equipment have already become more expensive before their homes have sold.

Homes become cheaper on a foreign-currency balance sheet, while building costs may rise on a NZ-dollar balance sheet. This is the tension facing the construction industry’s recovery.

The NZ dollar is not just falling against the renminbi

According to Jason Wong’s market report published on 5 October, the NZ dollar briefly fell to US$0.5586 last Friday before recovering to close the week at around US$0.5615; it was trading at around A$0.8070. The trade-weighted index briefly dropped to 63.8, reaching its lowest level in around fifteen years and falling for the sixth consecutive week.

Craigs Investment Partners investment director Mark Lister noted that the trade-weighted index had fallen by more than 4% over the past month. This means the NZ dollar’s weakness is not simply a shift against a single currency: New Zealand’s overseas purchasing power is under pressure more broadly.

Weak economic growth and interest rate differentials are important factors. According to the reporting cited above, New Zealand’s official cash rate was 2.75%, while Australia’s cash rate was 4.60%. Interest rate differentials are not the only factor determining exchange rates, but when the economic outlook is weak and international capital becomes more cautious, the NZ dollar can become less attractive.

The exchange rate both reflects economic pressure and transmits that pressure back to businesses and households.

Exporters benefit, but New Zealand households may not benefit immediately

A weaker NZ dollar is not all bad news.

For exporters earning foreign currency, the same amount of overseas sales revenue may convert into more NZ dollars. New Zealand also becomes relatively cheaper for overseas visitors, supporting tourism spending. During an economic downturn, a falling exchange rate can therefore provide something of a buffer.

But the benefits are not shared equally, nor do they immediately reach every household’s wallet.

Higher export earnings do not mean wages will rise immediately; more tourists cannot immediately offset households’ spending on fuel, imported goods and overseas travel either. Businesses that rely on imports may face higher purchasing costs before seeing any corresponding increase in sales revenue.

How quickly prices actually rise also depends on inventories, currency hedging, supplier contracts and market competition. A fall in the exchange rate cannot be equated directly with an increase in goods prices.

The real concern is that expenses rise before incomes catch up. If this leads households to postpone renovations, cut spending or reduce their home-buying budgets, the construction industry will feel the pressure on demand.

Costs are rising, but house prices may struggle to follow

Residential developers mainly sell homes to local buyers and earn revenue in NZ dollars, but some materials, equipment and transport costs are affected by overseas prices and exchange rates.

Suppose a purchase is fixed at US$100,000. If the exchange rate falls from NZ$1 buying US$0.60 to US$0.56, the NZ dollars required rise from around NZ$166,700 to NZ$178,600, an increase of roughly 7.1%. The supplier has not raised its price, yet the buyer needs to pay about NZ$11,900 more.

This is only a hypothetical example illustrating the exchange rate’s effect; it does not mean the entire project’s costs rise by the same proportion. But combined with price pressures on fuel, transport and some petrochemical-based materials, builders’ budgets may come under pressure in several areas at once.

The question is: who bears the additional cost?

In Construction Crossroads, BNZ chief economist Mike Jones noted that residential construction cost inflation was picking up again, while the bank expected house prices to remain broadly flat through to the middle of 2027.

Buyers have limited budgets, and new homes must also compete with existing housing. Developers cannot guarantee that the market will accept higher selling prices simply because costs have increased. If price rises hurt sales, businesses may have little choice but to squeeze their margins; when margins are insufficient to cover financing, construction timing and sales risks, projects may be delayed or scaled back.

Rising costs may lead to fewer projects getting under way, rather than higher house prices.

Even with consent, the numbers still need to stack up

There are already signs of a recovery in construction.

The BNZ report noted that residential construction activity grew 4.4% quarter on quarter in the second quarter, the strongest quarterly increase since 2021. However, residential construction volumes had previously declined for almost five years, contracting by roughly a quarter overall. A single marked rebound is not yet enough to establish that the industry has entered a sustained recovery.

Growth in residential building consents supports future construction, but the report also noted industry feedback that consents were not translating into actual building activity as smoothly as before, with some developments paused or scaled back because of market conditions.

Obtaining consent only clears the approval hurdle. Before starting construction, developers must still assess selling prices, costs, financing terms and how quickly sales proceeds will come in.

Improving approval processes and expanding the range of building materials available could both reduce obstacles to development. But if purchasing power is insufficient and sales are slow, easing supply-side restrictions may not immediately translate into busy building sites. Policy can make projects easier to approve, but it cannot guarantee they will be profitable.

Exchange rate pressure could also reach mortgages

A weaker NZ dollar could push up import prices, further affecting the outlook for inflation and interest rates.

An NZ Herald report on 2 October noted that market pricing at the time implied roughly a 60% chance of a Reserve Bank of New Zealand interest rate rise on 28 October. This was the market’s assessment at the time, not a Reserve Bank decision.

Economists also disagree on whether interest rates should be raised to address oil price and exchange rate pressures: if rising costs continue to spread, the Reserve Bank may need to act; if they mainly reflect an external shock while domestic demand remains weak, the economic effects of a rate rise must be weighed up.

If financing costs continue to rise, construction will face a dual impact: developers’ funding costs will increase, while buyers’ mortgage burdens may also grow. With materials and finance both becoming more expensive, yet homes not necessarily selling any faster, projects naturally become harder to plan.

Recovery needs to translate into orders and revenue

The construction industry’s fortunes also extend beyond building sites. A home connects businesses in design, construction, transport, kitchens, flooring, appliances, furniture and bedding. Project delays can affect orders along the supply chain; successful completion and handover can stimulate subsequent spending.

The outlook is certainly not entirely bleak. BNZ still expects modest growth in residential construction activity over the next nine to twelve months, supported to some extent by existing consents, the industry’s willingness to build and the pipeline of infrastructure projects. But the pace of recovery may differ across regions and businesses.

Returning to the opening question: with the NZ dollar cheaper, are homes now easier to sell?

For eligible buyers holding foreign currency, a lower exchange cost may make buying more attractive. But most local households remain more concerned about whether their incomes are stable, living expenses are manageable and monthly mortgage payments are affordable.

What the construction industry really needs is for buyers to be able to afford homes, projects to generate reasonable profits and businesses to remain viable.

How far the exchange rate has fallen is just one entry in the accounts. Whether homes can be built and sold ultimately depends on whether the overall numbers stack up.