House Prices Are Set by Serviceability, Not Just by Shortages or Affordability Myths
- Kieran Trass
- 5 days ago
- 5 min read
For years, the housing debate in New Zealand has been dominated by a single, simple story: We have a housing shortage. Build more homes and affordability will return.
It is an appealing narrative. It is also incomplete.
Recent international research, including from the US Federal Reserve system, challenges this assumption and, when viewed through a New Zealand cycle lens, reveals something far more important: housing affordability is primarily a serviceability and income problem, not a raw supply problem.
That distinction is important because it changes both how we interpret the market today and how we prepare for what comes next.
Supply matters structurally, but not cyclically
There is no question that New Zealand has long-term housing supply constraints. Land availability, infrastructure bottlenecks, planning rules, labour shortages and build costs all limit how quickly supply can respond.
But housing does not price in the long run.
It prices at the margin, in the cycle.
Supply responds slowly and often at exactly the wrong time. New homes tend to be delivered after booms, not before them. This is why history shows us repeated patterns of overshoot and undershoot rather than neat equilibrium.
In New Zealand, every major price surge has occurred before supply materially increased. Every major construction wave has followed, not led, the boom.
This tells us something important: supply sets the ceiling over decades, but credit and serviceability set prices within cycles.
Prices follow incomes and credit, not headcounts
One of the most important findings from recent US research is that many expensive cities did not suffer from a lack of building relative to population growth. In several cases, housing stock expanded faster than population.
Yet prices still surged.
Why?
Because incomes rose faster, particularly at the top end of the distribution. Higher earners, armed with greater borrowing capacity, bid prices higher even as supply expanded.
This dynamic is highly relevant to New Zealand.
Over the past two decades, price growth has consistently tracked:
Borrowing capacity
Interest rates
Income growth
Credit availability
Not household counts.
This is why prices can rise in periods of flat population growth and stabilise even when migration remains strong. The market is not driven by averages. It is driven by the marginal buyer’s ability to service debt.
Why affordability improves without price crashes
Another critical shift in modern housing cycles is the disappearance of forced sellers.
Today’s homeowners typically have:
Strong equity buffers
Fixed rate terms that provide short-term repayment certainty
Much lower loan to value ratios than in past cycles
When borrowing costs rise, buyers retreat. But sellers do not collapse altogether. Instead, listings are withdrawn, volumes fall, and prices fall at the margin as a result of those who capitulate and sell in the softer market rather than waiting until the market cyclically recovers.
This is exactly what New Zealand experienced after 2021.
Affordability did not begin improving because prices dropped.
It improved because:
Prices stopped rising
Incomes continued to grow
Interest rates eventually stabilised
This is how affordability heals in modern cycles: through time, not trauma.
Why “build more” is not a timing strategy
Calls to “just build more homes” ignore cycle timing entirely.
Increasing supply during a downturn does not restore affordability if credit remains tight. Increasing demand through lower interest rates before supply responds risks reigniting price growth before affordability has properly reset.
This is the policy trap New Zealand repeatedly falls into pulling demand levers early and supply levers late.
True affordability gains require alignment:
Credit conditions must stabilise
Incomes must catch up
Supply must arrive gradually, not surge into a weak market
None of this happens instantly and none of it is captured by headline shortage numbers.
The Staircase view
At Staircase, we view affordability as a dynamic, cyclical condition, not a static ratio.
The key questions are not:
“How many homes are we short or over?”
“How high are prices?”
The real questions are:
Can households service today’s prices?
Where are we in the credit cycle?
Are incomes catching up or falling behind?
Is supply arriving into strength or weakness?
Right now, New Zealand is in the early recovery phase following the post-2021 correction.
Prices bottomed in mid-2023 and have since recovered modestly, rising roughly 3.9% from the trough through to early 2026.
Volumes lifted around 10% in 2025 compared to the prior year. Serviceability is slowly improving as mortgage rates ease from their peaks.
Private-sector forecasts for 2026 cluster in the low single digits.
This is exactly how past cycles have reset affordability before the next expansion phase begins.
Those waiting for affordability to return via dramatic price falls may be waiting for a very long time.
Those who understand the cycle will recognise that affordability does not arrive with big announcements. It arrives quietly, gradually, and unevenly.
Housing affordability is not broken.
It is cyclical, and the data through early 2026 confirms the market is in the early stages of a measured recovery.
And like all cycles, it rewards those who understand timing, serviceability, and behaviour, NOT slogans.
Frequently Asked Questions (FAQ)
Are house prices in New Zealand mainly driven by a housing shortage?
Not entirely. Supply matters over the long term, but house prices are often driven more immediately by credit conditions, borrowing capacity, interest rates, and income growth. In practice, prices are usually set by what marginal buyers can afford to service, not just by the number of homes available.
What is mortgage serviceability?
Mortgage serviceability is a borrower’s ability to afford ongoing home loan repayments. It depends on income, interest rates, living costs, and lending rules. When serviceability improves, buyers can borrow more, which can support higher house prices even if supply is increasing.
Why can house prices rise even when more homes are being built?
Because new supply does not automatically lower prices in the short term. If incomes rise, interest rates fall, or credit becomes easier to access, buyers may still bid prices higher. Housing markets move in cycles, and demand-side factors often dominate in those periods.
Does building more homes improve affordability?
Building more homes can help affordability over the long run, especially by easing structural constraints. But it is not an instant fix. Affordability usually improves when incomes catch up, mortgage rates stabilise or fall, and supply arrives at the right point in the cycle.
Why does affordability sometimes improve without a big house price crash?
Affordability can improve through time rather than through sharp price falls. If prices stop rising while incomes continue to grow and interest rates ease, buyers gradually regain purchasing power without a dramatic market collapse.
What happened in New Zealand after the 2021 housing correction?
After the post-2021 correction, affordability began to improve gradually as prices stabilised, incomes kept growing, and mortgage rates eventually started easing from their peaks. That pattern fits a modern housing cycle where recovery is often measured rather than dramatic.
What should buyers watch in the New Zealand housing market in 2026?
Buyers should focus on mortgage rates, lending conditions, income growth, and where the market sits in the property cycle. These factors often matter more for short- to medium-term price movements than simple housing shortage headlines.
Is housing affordability in New Zealand a supply problem or a credit problem?
It is both, but on different timeframes. Supply is a long-term structural issue, while affordability in any given cycle is more strongly shaped by credit availability, serviceability, and income growth.
Comments