Just in! Inflation falls to 3.7%, so why is buying or building a home still so difficult? Pressure from oil prices, the NZ dollar and interest rates

New Zealand’s latest inflation figures have finally brought some good news.

Data released today by Stats NZ show that the consumers price index (CPI) rose 3.7% in the year to September 2026, below the second quarter’s 4.1% and the Reserve Bank’s earlier forecast of 3.9%. On a quarterly basis, prices rose 0.7% in the third quarter, a marked slowdown from the second quarter’s 1.5%.

But for households preparing to buy a home, homeowners repaying mortgages and developers planning new projects, these figures are not enough to bring a sigh of relief.

Inflation remains above the Reserve Bank’s target range of 1% to 3%, while electricity prices, local government charges and new home construction prices continue to rise. Meanwhile, the recent rebound in oil prices and weakening NZ dollar have added uncertainty to the outlook for prices and interest rates.

How much pressure can falling inflation actually take off the housing market? The answer requires a combined look at household spending, borrowing costs and building budgets.

1. Inflation has fallen, so why is living still so expensive?

A falling inflation rate means overall prices are rising more slowly. It does not mean prices have returned to their previous levels.

According to interest.co.nz reporter Mandy Te’s coverage of the latest figures, petrol remained the largest contributor to annual inflation, with prices up 19.1% from a year earlier. Other price increases related to household living and housing also deserve attention:

These figures have a direct bearing on the ability to buy a home.

For first-home buyers, rising everyday expenses may reduce the amount they can save towards a deposit each month. For existing mortgage holders, increases in local government charges and electricity prices add to the costs of owning a home beyond mortgage repayments.

Even if house sale prices fall, households may not have more money available each month for mortgage repayments unless their incomes also improve.

Assessing whether buying a home has become easier therefore requires more than looking at asking or sale prices. It also means considering whether a household will still have enough cash after paying the deposit to cover everyday living costs and unexpected expenses.

2. Why is a quarterly fall in petrol prices consistent with an annual rise?

An important reason inflation eased in the third quarter was that petrol prices fell 6.5% from the second quarter.

But petrol prices were still 19.1% higher than in the third quarter of 2025. Quarterly and annual changes use different comparison periods, so both can occur at the same time.

More significantly, quarterly averages may also differ from what motorists have experienced at the pump in recent weeks.

In his NZ Herald report on 22 October, Liam Dann noted that global oil prices had begun rising again in early September. Combined with a low NZ dollar, this was pushing local petrol prices up again. In other words, the third-quarter figures captured an earlier period of easing but may not fully reflect the pressures taking shape in the fourth quarter.

This is also why several banks warned before the figures were released that the third-quarter fall in inflation might offer only temporary respite.

For households, higher fuel prices increase commuting costs. For the construction industry, they may add to project expenses through materials transport, machinery use and the running of construction vehicles.

However, whether these costs feed through to final quotes, and to what extent, also depends on contract arrangements, business profit margins and market competition. A rise in oil prices cannot simply be assumed to produce a proportional rise in building prices.

3. How does a weaker NZ dollar affect housing budgets?

The NZ dollar exchange rate may seem far removed from buying a home, but it can affect the housing market through import costs.

When overseas goods are priced in foreign currencies such as US dollars, a weaker NZ dollar means importers must pay more NZ dollars for the same quantity of goods. If international oil prices rise at the same time, local fuel prices may face pressure from both sources.

Some equipment, components, building materials and raw materials used in construction are also imported, so exchange rate movements may affect purchasing and restocking costs.

These effects do not usually appear immediately or in full in every quote. Existing stock, advance purchasing, currency hedging and suppliers’ willingness to absorb some costs all influence how quickly they feed through.

For projects with longer construction periods, however, exchange rate fluctuations mean budgets need a contingency. Developers and builders may need to reconfirm whether quotes obtained today will cover purchasing costs several months later.

For homeowners comparing building options, this also makes quote validity periods, materials price adjustment clauses and what the price includes more deserving of careful scrutiny than a seemingly low total price.

4. Why are building prices still rising when the housing market is soft?

The latest CPI shows that new home construction prices rose 3.2% from a year earlier. Respondents to Stats NZ reported that higher materials, subcontracting, labour and fuel costs had pushed up new home prices.

A distinction is needed here: new home construction prices are different from sale prices in the existing housing market, and do not provide a uniform measure of actual cost increases across all projects.

Prices in the existing housing market are influenced by negotiations between buyers and sellers, borrowing capacity, the number of properties available and local demand. New housing projects also face expenses including land, design and approvals, infrastructure, construction and finance.

The housing market can therefore quite plausibly see buyers seeking lower prices and existing home sales under pressure, while builders still find it difficult to lower their quotes.

For developers, this means projects may be squeezed at both ends: uncertainty over sale prices and the pace of sales on one side, and construction and financing costs on the other. If expected sales revenue cannot cover all costs and leave a reasonable return, projects may be redesigned, delivered in stages or have their start dates deferred. Rising costs alone do not guarantee that new home sale prices can rise accordingly.

5. The September housing market: more choice, but sales have not kept pace

REINZ’s September figures, released on 14 October, showed 5,752 residential sales nationwide, down 11.6% from a year earlier. Seasonally adjusted sales volumes fell 4.3% from August.

The national median sale price was NZ$755,000, down 2.3% from a year earlier, while the House Price Index (HPI) fell 1.5% annually. Meanwhile, the number of properties available for sale reached 34,001, up 10.7% from a year earlier. The median time to sell was 46 days, 3 days longer than in the same period last year.

Together, these indicators portray a cautious market: buyers have more properties to choose from and prices have softened, but this has yet to prompt a marked increase in the pace at which buyers enter the market.

For buyers with sufficient budgets and stable incomes, more listings and longer selling periods may provide room to compare and negotiate. But whether lower house prices translate into better affordability still depends on how loan amounts, interest rates, incomes and living costs change together.

National trends cannot be applied directly to every neighbourhood either. REINZ noted marked regional differences in September, with some South Island markets remaining relatively strong. Assessing an individual property still requires consideration of local sales, its condition and comparable listings.

6. CPI was below expectations, so why does the risk of interest rate rises remain?

Market attention will next turn to the OCR review on 28 October. The OCR currently stands at 2.75%, and the next decision has yet to be announced.

The lower-than-expected inflation figures give the Reserve Bank a more benign signal. But it must also assess whether recent energy price increases are spreading into broader, more persistent price pressures.

According to the NZ Herald’s report on 22 October, annual inflation excluding food and energy rose from 2.5% in the second quarter to 2.9% in the third. On this basis, Capital Economics considered that underlying price pressures still warranted caution and maintained its forecast for a 25 basis point rise in October, followed by further increases, with the OCR expected to peak at 3.25%.

Meanwhile, economists also disagree on the extent of tightening.

In her report published in NZ Adviser on 20 October, Mina Martin outlined Infometrics’ forecast at the time that the OCR would reach 3.75% in April 2027. ANZ’s forecast of 16 October pointed to 3.5% in March 2027.

ANZ also warned that an excessive response to inflation in the early stages of an energy shock could leave the economy facing overly tight monetary conditions later. Higher energy prices push up prices but also squeeze consumption. If the global economy subsequently slows, the inflation and demand environment could both change.

These are institutional forecasts, some published before the latest CPI release. They should not be treated as commitments by the Reserve Bank or an established path for interest rates.

Mortgage borrowers should also bear in mind that fixed mortgage rates are influenced by wholesale funding costs and market expectations of future interest rates, as well as the current OCR. Some expectations may already be reflected in quoted rates, so OCR adjustments and fixed mortgage rate changes do not necessarily occur at the same time or by the same amount.

YIJU’s perspective: can easing inflation truly reduce the burden of housing costs?

This fall in inflation is a positive signal, but there is still some distance between it and an improvement in housing affordability.

The housing market’s performance in September shows that softer house prices and more properties for sale have given some buyers greater choice and room to negotiate. Yet sales volumes have not recovered alongside these changes, suggesting that price adjustments have not been enough to dispel buyers’ concerns. Living expenses, borrowing costs and expectations for future income and employment may all influence whether households are willing to take the step into home ownership.

Lower house prices can reduce the purchase cost, but long-term affordability still depends on the monthly budget after buying.

For existing homeowners, changes in electricity prices, local government charges and mortgage outgoings also affect the pressure of owning a home. A falling inflation rate does not automatically offset earlier cumulative price rises. If household income growth is limited, the effects of rising bills will persist.

The construction and development sectors face another set of challenges: sales must respond to buyers’ budgets, while costs remain constrained by spending on materials, labour, transport and finance. Continued increases in new home construction prices mean a weak housing market will not necessarily deliver cheaper new homes. If project margins keep narrowing, developers may adjust project scale or delay construction, affecting future housing supply.

In YIJU’s view, the next issue to watch is whether easing inflation can gradually translate into practical improvements in three areas: higher household disposable incomes, more stable housing finance conditions and the delivery of new homes at prices buyers can afford.

The OCR review on 28 October will provide fresh information on the direction of interest rates. But oil prices, exchange rates and domestic demand are still changing, and a single decision is unlikely to remove all uncertainty.

For readers preparing to buy a home, holding property or participating in residential development, assessing whether the market is improving requires looking at sale prices, monthly cash flow and total project costs together. These three sets of accounts determine how much practical breathing room falling inflation can actually provide.