Unemployment Hits 5.6%: Why Mortgage Defaults Stay Low

Nick Goodall (00:01): Kia ora and welcome to the New Zealand Property Market Podcast, brought to you by Cotality for the 10th of August 2026. I'm Head of Research, Nick Goodall, and today I'm joined as per usual by Chief Economist Kelvin Davidson. Kelvin, it's all about the labour market this week, so let me get straight into it. Not a great headline figure for the unemployment rate itself, but equally maybe not quite as bad as it sounds. Is that a fair initial assessment, mate?

Kelvin Davidson (00:26): Yeah, I think so. I mean, if there's such a thing as a good rise in unemployment, this was sort of probably it, I suppose, or less bad in the unemployment rate. So yeah, we saw the unemployment rate go up from 5.3% in Q1 to 5.6% in Q2. There may have been a revision to that Q1 number potentially—I think maybe it was revised up 0.1. But either way, quite a big lift in the unemployment rate.

Now, when I say a "good" rise in the unemployment rate, no rise in the unemployment rate is really good, so that's "good" in air quotes. But the reason I say that is because it came from just a bigger labour force. It wasn't job losses; in fact, employment went up in Q2. Labour demand went up effectively, so more people were actually working. But on the other side of the equation, there were also a lot more people available for work. Our overall working-age population went up, and a higher proportion of those people available actually made themselves available for work. Labour demand went up, which is pretty encouraging given everything that's been going on. There were actually more people in employment, but labour supply went up even faster, so you saw that overall proportion of unemployed go up.

A 5.6% unemployment rate is the highest in ten or eleven years, so we haven't seen this for a while. But if you can say it was good, well, this is about as good as it gets in terms of higher unemployment. That was the overall conclusion for me. There are other measures around that in terms of underutilisation—where people are wanting more hours, like part-timers wanting full-time work—that rate went up, so that's probably not quite so encouraging. Wage growth was still pretty subdued. It's not like this is a great number, but at least we haven't seen mass job losses, and I think that's an important part for the housing market in particular. We're not seeing repayment problems or mortgagee sales because people have stayed in work and generally are able to keep paying that mortgage because they've still got an income. Servicing has played a role there as well; test rates have weeded out potentially risky loans before they were even over the starting line. The headline number wasn't a great number for the labour market, but at least employment isn't falling, so take a silver lining from that.

Nick Goodall (02:56): It's definitely easy to take this data however you want, right? If you want this to be evidence of a difficult labour market and a struggling economy, you can certainly find the data to back that up. Equally, if you want to look for something that's more promising in the data, you can find that too. From a property market perspective, if you don't want housing values to fall away because people lose their job and can't pay their mortgage, this shows there's less likelihood of something like that occurring. In terms of the health of the economy, it's a loose labour market. There are people looking for work, wage growth is relatively low because workers are mostly happy to have a job and don't really have the power to demand more money.

If you flip that around and look for evidence of second-round inflation, if wage growth is not that strong, then maybe there's less need to fight against high inflation because that wage inflation isn't going to push through to higher inflation later on, once we get past the spike from disruption in the Middle East and high petrol prices. You could put an argument there that says the signs of second-round inflation are low, so you don't need to keep hammering the Official Cash Rate higher.

This is partly why there is such a strong debate as to what should happen with the OCR, because the data can be seen in many different lights. Economists put out their takes on this, and I took two major things from them. First, the forecast for where this unemployment rate is likely to sit. Many had unemployment peaking in Q3 this year, though it might peak at the same level as Q2 and stay at similar levels before declining slightly. The Reserve Bank previously forecast it at 5.4% and staying there for three or four quarters, so it might stay around 5.6% for the next few quarters.

The second thing was the regional split. Kiwibank put out a chart looking at regional unemployment levels, talking about a "tale of two islands": the North Island having an unemployment rate at 6.0%, and the South Island down at 3.7%. Regionally, Otago and Canterbury sit at 3.6%—not too bad down south. In the north, Northland stuck out at 8.8% unemployment, with Auckland next at 6.5%. Wellington sits in the middle at 4.9%, which isn't as bad as many people might have expected given the government sector cuts. Maybe people looking for work aren't moving to Wellington anymore and are heading to Auckland or Christchurch instead. Other parts of the North Island sit around 5.6% to 5.8% for Hawke's Bay and the Waikato. Canterbury and Otago sitting low is a reflection of those strong agricultural industries.

What influence do you think this should have over the Reserve Bank when they make their OCR decision on the 2nd of September? Do they need to continue getting it to neutral, or is there enough here showing wage inflation is subdued at 2.0% (well below headline inflation of 4.0%) to let them hold steady?

Kelvin Davidson (08:11): You could find arguments in these figures for both positions. Regarding that Wellington unemployment number, the impact on the housing market isn't just about direct job losses; it can also be an indirect spillover where people feel uncertain and job security feels lower. You don't necessarily need direct job losses to restrain a housing market; spillover effects mean people don't spend as much and confidence drops.

In terms of the labour market impact on the Reserve Bank, I still lean towards no real impact—they'll probably stick to the path they thought they were going to be on anyway. Wage growth is subdued and doesn't hint at strong second-round inflation impacts yet, but the Middle East situation is lingering, fuel prices are high, and the Reserve Bank remains alert to those risks. The "least regrets" option is to stick to the path and get the OCR back to neutral. Monetary policy reacts with a lag, so trying to get ahead of the curve makes sense. I lean towards a rate rise at the next meeting on the 2nd of September, but anything could happen when the full forecasts and media statement come out.

Nick Goodall (10:32): For what it's worth, I agree on what they will likely do. I'm just not sure the economy or the bounce-back will be as fast as they think. I have doubts about where economic growth is going to come from, and without much growth, there isn't much upward pressure on inflation. If the Strait of Hormuz remains disrupted, this short-term cost spike won't go away soon. But if we assume a resolution occurs and petrol prices fall, inflation could come down quickly. We don't have any official Tier-1 statistic releases between now and the next decision, outside of filled jobs and fast reads like the GDP Nowcast. Official Q2 GDP won't come out until late September. So their minds will mostly be made up unless other data releases are hugely surprising.

Moving on, last week you wrote a Pulse article looking at the Reserve Bank mortgage lending data—a listicle outlining 10 things to know. What did you find most interesting, and what did the media pick up on?

Kelvin Davidson (13:52): The overall story from mortgage lending is that growth has slowed down, which goes hand-in-hand with slower sales volumes. Behind that overall slowdown, investors have cooled a bit, which matches our buyer classification figures. Investors appear to be hitting up against high-LVR buffer limits that the Reserve Bank adjusted late last year.

First-home buyers remain strong, with 50% to 60% accessing low-deposit finance with less than a 20% deposit. Non-performing loan ratios on bank books remain very low because employment has stayed strong, meaning mortgage holders have largely kept their jobs and incomes. Internal bank serviceability testing has also weeded out risky loans before origination.

Refinancing and bank switching remain active, though down from the peak at the end of last year. About 10% of debt is on floating rates and ~30% is fixed due to reprice within six months, giving borrowers flexibility to chase bank cashbacks. When taking out new loans, there is a clear push toward fixing longer—the two-year fixed rate has become very popular as borrowers take out insurance against future rate rises.

Nick Goodall (17:47): That non-performing loan metric is important because, despite being in the worst housing downturn in forty years, we haven't seen mass falls after the initial correction. Because credit standards improved and people kept their jobs, those with mortgages have managed to hold on. While youth unemployment is high, those demographics typically don't own property, so it doesn't trigger forced housing sales, though it does suppress rental demand as young people stay home with parents longer.

Additionally, interest-only lending has stayed under control, showing borrowers aren't experiencing the severe cash-flow crisis that requires restructuring away from principal-and-interest payments. Bank switching remains popular, and borrowers with good records should negotiate aggressively with lenders or mortgage advisors. Household mortgage debt sits at $400 billion against $1.7 trillion in total property value, but that debt is highly concentrated among roughly a third of Kiwis, meaning interest rate changes have a concentrated impact. I'll leave a link to Kelvin's full Pulse article in the show notes.

Kelvin, any short preview on the upcoming Pain & Gain report before we wrap up?

Kelvin Davidson (22:26): Pain & Gain comes out later this week. The market currently favours buyers, so short-term resellers aren't performing as well. Hold period remains the critical variable: if you hold for a decent period, a loss is unlikely, whereas buying and selling within a short window increases the likelihood of a loss. Full details will be out later in the week.

Nick Goodall (22:48): Pockets like Auckland apartments are worth paying attention to in that data as well. Otherwise, hold period is core.

Moving to the weekend, the All Blacks tour of South Africa got underway with a win over the Stormers, and Ma'a Nonu was named on the bench for the Sharks. How was your weekend, mate?

Kelvin Davidson (23:56): We went away to Hanmer for a weekend with friends without kids—just four adults chilling out and catching up. I didn't see the All Blacks game in full, just highlights. On the NRL front, the Warriors had an impressive win over Penrith, with Luke Metcalf making a strong return. It's setting up an exciting finals series.

Nick Goodall (24:45): Up the Wahs! Luke Metcalf looked happy to be back, and their first half was dominant. Hopefully they can string it together for the finals.

That will do us for today. Thanks very much, as per usual, for your insights, Kelvin. Thanks to everyone for listening, and please do get in touch with any questions or feedback. My name is Nick, he's Kelvin. You've been listening to the New Zealand Property Market Podcast. Mā te wā.

‍