The Squeezed Margin: Q2 Building Costs and the Looming CPI Realities

Nick Goodall: Welcome to the New Zealand Property Market Podcast brought to you by Cotality for the 22nd of June 2026. I'm Head of Research, Nick Goodall, and today I'm joined, as per usual, by Chief Economist Kelvin Davidson. Kelvin, I've got a Hurricanes team to wax lyrical about later on. And also, I think some very interesting economic data which we're going to have to tease out. But before we get to all of that, do you want to take us through your Pulse article from last week where you looked into what we call the trade-up premium across the country, looking at that difference in value between three- and four-bedroom properties?

Kelvin Davidson: Yeah, so I mean that's the hub of it there, or the nub of it. What we look at here—we've done it sort of every year for the last four, five, or six years maybe—is simply looking at a so-called trade-up premium. The way we measure it is by the value gap between three- and four-bedroom houses. It's either going to be that extra debt that needs to be found or the extra equity that would be required to trade up. Now, it won't be everyone's definition of a trade-up. Maybe some people want a better suburb or a newer house, whatever it is. But a lot of people would say getting that extra bedroom would be how they think of a trade-up. You probably get an extra bathroom with it as well, so it's a pretty good measure for a lot of people.

It's still pretty pricey. I'm not saying trading up is easy. If you look in parts of Auckland City, the North Shore, or Queenstown, you're looking at a value gap there of at least $400,000. In Auckland City, it was pushing up towards $600,000, I think, from memory, which is going to be reflecting your really expensive suburbs there like Herne Bay and Remuera. So the gap is still pretty large.

There are other markets where it's lower. If you go to say Kawerau, that's less than $100,000. In that market, $100,000 might still be a lot for the people that live there, but when you look across the country as a whole, there is a divergence between those markets that are very pricey and those ones that are lower. Generally, it's still going to be a lot of cash wherever you live.

So yeah, I'm not saying it's easy, but I guess the really key point is that it has got easier. It's a bit like general housing affordability having improved; it's easier than it was, but not necessarily easy. I think it's the same for this trade-up gap. It is still pretty high, but it has come down. For example, in Auckland City, yes, the gap there is still large, but it's down 7% in the past year. Those four-bedroom houses have, if anything, fallen a little bit more than the three-bedroom houses, so that gap closes a bit. Hastings is down 12%.

There are other markets that have gone up a little bit, but some of those markets with those big gaps have actually closed a little bit. Wellington City, if you go back sort of three or four years, that trade-up gap had peaked at around $282,000, and now it is down to about $241,000. So again, it's still quite large, but that's $40,000 less than what it used to be.

Like a lot of things, there are pros and cons, six of one and half a dozen of the other. But the point here is that it has closed, and sometimes in a softer market, people perhaps go into their shells a bit. We've seen that with the movers' data from our buyer classification; these relocating owner-occupiers are a bit quieter than normal at the moment. But if anything, now would be the time to maybe think about making that move because that trade-up gap has got smaller in a lot of places. It is difficult with the economy and uncertainty, but downturns can be a decent time to look at that trade-up. It could be a time to think about it. Of course, people get stuck in the mentality of, "Well, I won't get as much for my own house, maybe I'll just wait until that improves," forgetting that they might get an absolute screaming deal on the next one. So yeah, lots of considerations for people. Again, not saying it's easy, but that gap has closed a bit and it could be a good time. Check out the stats.

Nick Goodall: Yeah, I'll leave a link to the full article, and it's worth going and having a look at those stats for your local area. I just think it's a worthwhile exercise to go through. It is relevant right now, as you said, because we've seen that reduced activity from movers. This is saying, well, from one perspective—which is literally just property price to property price of those two types of property—it's looking more attractive now than it has in recent times.

As you said, there are still other things to consider. There is the economy and the concern people seem to have, which is, "If I do buy a property before selling the other one, what if it takes longer to sell this old property and I have to hold two properties for a period of time, or I can't rent it out?" It depends on what they want to do with that old property too, because they're not always just going to sell it and move to the next one. Sometimes you hold on and might rent that one out as an investment property.

There's lots to consider here, but it is just quite a nice measure. It also, as you touched on, reflects the fact that the next tier of the market hasn't performed as well because demand has been so much lower for it. We've seen those lower-value properties hold up a bit better, and even see some increase in those types of properties where first-home buyers are quite active, like three-bedroom houses. But the next tier up hasn't had as much demand, and there is a relatively high supply for the amount of demand that's been trying to buy those properties. So we've seen those property prices be a little bit more withheld. It reflects all those things we talk about all the time, but puts it in quite a nice context and a way that people can understand it. It brings forward that conversation, and that's certainly the way the journalists seem to talk about it, right? The headlines were like "Never a Better Time to Trade Up," which I think is a pretty standard way of looking at this with the way we put out the data. That makes sense. So yeah, a good one, worthwhile going and checking out.

We will leave that one there, I think, Kelvin. I do want to spend a bit more time on the economic outlook and economic view of the market right now. In a very brief summary, given the data we got last week, I'd say the economy is slightly weaker than expected given the Q1 GDP numbers. It's a slightly lower base that we're starting from. But also, inflation is lower than we expected off the back of those Selected Price Indexes for May. And then, of course, we've got the potential—and I still say potential—for a genuine peace deal in the Middle East. Early last week it looked a lot more promising than maybe it does over the last 24 hours. But if you put all these things together, my ultimate point has to be: surely there's a sliver of hope that the OCR will be held in just over two weeks' time off the back of this data?

That definitely has to be the question for me. I don't know what the percentage change is. Was it a 100% chance we'd see an OCR increase in a couple of weeks, and now that's come down a little bit? Maybe we'll get to that shortly. Do you want to just run us through those exact figures we got and a bit more detail behind the GDP, where the economy is at, and that Selected Price Indexes data for May which we got last week? Then maybe we can talk about the more recent developments of the potential peace deal between Iran and the USA. But yeah, over to you for the data.

Kelvin Davidson: Yeah, gee, I've gotta say, I'm glad I'm not on the Monetary Policy Committee because there are so many moving parts. But yeah, the GDP numbers for Q1 were pretty good. As you say, they're maybe a little bit lower than expected, with a 0.8% increase in Q1. I guess most bank economists, and I think the Reserve Bank, had a projection of about a 1% increase. So, you know, maybe it's a little bit lower than what was anticipated. There were some sort of technical things going on behind the scenes with some adjustments they make each year, and I think seasonal adjustment might have been a factor in there or something. It might not necessarily be the true picture when it potentially gets revised down the track; it might not necessarily hold at that 0.8%.

But yeah, if anything, taking it at face value, it's a little bit lower than what people were anticipating. From the monetary policy perspective, maybe there's just a little bit more spare capacity than what was previously thought. All else equal, that would tend to reduce the chances of that OCR increase coming through sooner rather than later. So that's one thing.

Add to that, as you say, we had some slightly more subdued inflation numbers than what people were anticipating. It's hard to give an overall average for those Selected Price Indexes numbers because it's only part of the CPI and it's done monthly versus the benchmark quarterly CPI. But the expectations for those numbers were undershot as well, to the point where most of the bank economists actually put out numbers pretty much straight away saying they downgraded our Q2 CPI figure off the back of those monthly inflation numbers. Where Q2 CPI was expected to come in at about 4.5%, it has now been downgraded to sort of 4.0%. It is still too high where the target's 1% to 3% over the medium term, but 4.0% is better than 4.5%. Adding that to those slightly softer GDP numbers, you start to put a little bit more doubt over that potential July OCR increase.

And then yeah, the peace deal. A few days ago it was looking a bit stronger than maybe it is right now, but if you start to think about the peace deal holding, it looks better for the economy and for inflation to come down a little bit sooner than expected. Again, that all reduces the chances of that sort of near-term OCR increase. If anything, that all sort of argues in the same direction.

But then we also had some stats last week on retail spending that were a lot stronger than expected, though that might just be a delayed thing. That was spending for May, so it might just be a timing thing where the April numbers were really weak, people were really uncertain, and they kind of held back spending a little bit, preferring to have some cash in the bank. Then maybe they thought, "Well, maybe this thing looks a little bit better, I'll come out and spend in May." So it might just be a timing thing, but it does add to the mix.

Nick Goodall: Yeah, I mean, I guess the question then is: was there anything in the Selected Price Indexes that tells us about the likelihood of second-round inflation? We've heard them talk about that so much through the Monetary Policy Committee and the Reserve Bank. Do we get a feel for how embedded this inflation might be? If they are waiting for that sign, is that likely to lead them to go, "Yeah, we can err on the side of caution and hold here," or is there not quite enough in there for them to lean that way?

Kelvin Davidson: Yeah, I'm not so sure. I think it probably still really picks up on stuff that's happening right now. I guess it probably doesn't necessarily tell you too much about inflation expectations and that wage-bargaining sort of thing. But you might be able to infer from this, when you combine it with other stats as well, that potentially in this sort of consumer environment where people are a bit reluctant to spend, firms' input costs have gone up. We hear about builders having delivery surcharges and all of this stuff. We know firms' input costs have gone up, and maybe there's a sense that it's not really flowing through to output prices. In this sort of weak environment, firms are actually struggling to pass that on to consumers, so that might be some sort of inference that second-round inflation is less likely than what might have been anticipated. But yeah, I don't necessarily think it would be clear yet. All else equal, it is better numbers than expected.

Nick Goodall: Yeah, fair enough. I'm really interested to see how this goes. I know we've got two weeks and there'll be a few more data releases in that time for the committee to weigh up. I just wonder if there might be enough in there for them to go, "It's still worthwhile waiting a little bit longer," and also waiting until they get the full statement, not just the review which they do in July. So yeah, I don't know. I reckon that percentage chance is coming down. Is it quite down to 50/50? Maybe not. Maybe it's still leaning towards something like a 60% or 70% chance of the increase, but I just wonder if it's just drifting lower the more and more data we get that shows there's no desperation here to try and fight against this inflation, rather than it being really sticky and staying in the economic environment.

We know that those petrol prices are still high, but they have come down a little bit too off the back of the announcement of the peace deal. And yeah, again, like you say, whether or not the potential walkout, which I think we read about this morning, means that those petrol prices go back up again, I'm not too sure. It's pretty early days on that one. Of course, it is volatile, so we shouldn't get too carried away with it. But I just wonder if there are more and more signs of the justification to wait a little bit longer—wait for more data, wait for more information, wait for more progress on the peace deal. Just wait and see what happens. There's no desperation to fight against this inflation just yet if you still expect the medium-term level to not necessarily stick around too high. But yeah, still a couple of weeks to go, and there is plenty more water to go under that bridge anyway. So I guess we just wait and see what happens.

Kelvin Davidson: Yeah, yeah. Preparing for this episode, I actually just went back and had a look at what the Monetary Policy Statement said last time because it's a lot to digest. Maybe you give it a couple of weeks, go back, and see some new phrases. That's just been going around in my head, and yeah, I tend to agree that the odds of a July increase have probably lessened quite a bit, provided this peace deal holds, which seems to change from day to day. That's a big unknown, and I guess we should always be pretty cautious about that.

But you just think about the mechanics of it. It was a three-all split last time in terms of that vote. With inflation a little bit softer, GDP a little bit softer, and maybe the peace deal holding, it's difficult to see those three people who voted for a hold changing their minds. Those three people probably stick with their hold decision. So then you think, okay, well, what do the other three do? It's not hard to imagine that just one of those people decides to vote the other way and stick with the hold, and then you get that hold in July.

Maybe the focus really goes on those people, which we only know now through this publication of the vote, and what those other three people might do. It's not too hard to imagine one of them going back the other way. Just the mechanics of the voting process now, for me, kind of suggest that a July increase is a bit less likely.

But I went back and had a look at what they said, and it was pretty clear in the forecast at that time that they were definitely pointing towards a July increase. But with that voting record being split, it wouldn't take much for one person to go back the other way. It talked about how they sort of assumed the conflict would last most of this year, pretty much. Now, it still could, I guess, but the chances of that look a little bit less likely now. So yeah, it's difficult to put odds on it, but maybe July is 50/50.

Just the timing—the July decision is a Monetary Policy Review, so they can't fully revise the forecasts. Maybe they do wait until September so they can get that full set of forecasts out. It's kind of easy to sit on the fence, but 50/50 for July. I reckon the chances that they wait have grown just because of that voting thing; it wouldn't take much for one of those people to switch back the other way. They've still got the meeting in September to push through that OCR increase if they want to.

There was a phrase I picked up on again this morning that I'll read. It just says, "The committee remains focused on bringing medium-term inflation back to target and expects that OCR increases will be required this year." Look at those numbers and the projected track for the OCR; it did look fairly likely they planned to increase. So I don't think it's a question of no increases at all. I think probably what you're talking about here is: is it July, or is it September? It's probably that sort of scenario.

Yeah, I think probably July is a little bit less likely, and September is maybe a higher probability. Certainly, if they didn't go in July, you'd expect they would in September based on those projections and that quote I just read out. But yeah, is it July? I don't know, 50/50. And I think for me, like I've said, just the mechanical process—I just don't think it would take much for one of those people who voted for a rise to go back the other way. So we'll see.

Nick Goodall: Yeah, I mean it's a good point. I suppose equally it wouldn't be that hard to see one of those that voted for a hold to then say, "Yep, we've seen enough to have the increase," especially if it was the Governor. If she went that way and she's got the casting vote, then if you did a couple of switches, she gets the one. But equally, I wonder if the greater likelihood is that they vote the same way. The three internals vote for a hold, the three externals vote for the increase, and once again it comes down to the Governor's vote. So yeah, I guess that increases the likelihood of that hold more than it would have been the other way around.

Anyway, we'll quit the speculating for now. I'm sure we'll do more of that, not just next week, but certainly the week after in the few days in the lead-up when we'll have all the data available to us that we know they'll have available, and we can get a much greater feel for what's going on there.

Look, there's plenty to continue to watch for. It does feel like the central conversation right now is trying to get that feel for where the economy is at, where inflation is at, how sticky it is, and what we have to do about it now. Of course, I agree with you that yes, we're going to see those increases, so that's a matter of timing. There is that feel across the board that we've got to get back to what they call the neutral rate, which must be somewhere in the 3% rate. So it will drift that way. It's just a matter of what is the speed to get there, how much time do you wait, and how much data do you wait to get before you want to figure out what the timing of that is. And how much of a problem is that genuine second-round inflation going to be that you need to do it sooner rather than later to get on top of something that we know is going to occur later on down the track and is not necessarily affecting us right now?

But yeah, look, we'll leave it there. I think it's a great discussion and there's plenty in it, but there'll be more of that to come. Otherwise, in terms of what's out there at the moment, mate, our monthly video is now live, so that is on the YouTube channel if you want to go and check that one out. We've also got our Chart Pack out this week, Kelvin. You've obviously written that one; it goes out to media, I think, by Wednesday for publication on Thursday. Anything you wanted to tease on that? What's the focus on that one yourself?

Kelvin Davidson: Buyer classification again—I try to pump that whenever I can. We are still seeing strength from first-home buyers. Some interesting stats are coming in on investors, I'd say, so that will be one to watch. We know that the election's coming up, and there are some things around tax policies, so maybe there are just some hints in there that investors are getting a wee bit nervous. So yeah, one to watch. But continued strength from first-home buyers; they just roll on. But yeah, an interesting one for investors, so look out for that later in the week.

Nick Goodall: Yep, absolutely. That'll go out on Wednesday for Thursday, so keep an eye out for that one on the articles on Thursday.

That'll pretty much do us for the economic and property market chat, Kelvin. So if that is all you are here for as a listener, you can happily go now, especially maybe if you're a Chiefs supporter. Kelvin, I know that you didn't get a chance to catch the Canes, but I of course made it live. It was a bit of a crazy couple of days, really. I've been from Queenstown to Christchurch. I went to the Shapeshifter concert on Friday night in Christchurch, and then my flight was disrupted with all the wind both in Christchurch and then in Wellington, to the point where my flight was diverted from Wellington to Palmerston North on Saturday afternoon.

Firstly, I couldn't play my own football game because I was hoping to go straight from the airport to that game and could not do that seeing as I went to Palmy. But more importantly, I was worried I was not going to make it back down in time for the final, and of course had tickets for myself and my son. So yeah, I did end up flagging the bus which was put on by Air New Zealand and hiring a car to make sure I got back down in time. I managed to get back to Welly by about 5:00, return the car, get back home, scoop up my son, and get to town for the game.

We made kickoff, and it certainly was worth it when you see the performance the Canes put out—just so impressive. It was so crazy windy there, and they probably did have a wind advantage, but it was hard to even know where the advantage was because it was the typical Cake Tin weather where it gets in and swirls around, and it was making some weird movements, that's for sure. But I'm so stoked for them. They got to play a similar brand of rugby in the final to the rest of the tournament, where they had been electric and just so attacking, scoring some amazing tries throughout the tournament, including in the final. I'm just glad it all came together.

I feel for Chiefs supporters—four finals in a row to lose is tough, tough stuff. I do pity them a little bit, especially when they're losing to different teams every year. They lost to the Blues who ground out a win a few years ago. The Crusaders came back with a vengeance last year and again ground them out in the final. But the Canes just blew them off the park. What a win, what a team, and they just put it all together.

That was amazing. Stuck around for the trophy ceremony, and you can tell they've got a great culture as well. Yeah, just a great time. It's my first year as a season member—we picked that at the start of the season—and yeah, we couldn't have picked a better time to finally sort of get in there and do that.

I think also the organization has done a great job at engaging with the public. They put on some great halftime shows, the light shows, the fireworks, and everything that comes with it. They've had the kids' days and really made a bit of a family experience too. So it has just been a great time to get down to the stadium. I'm a bit of a critic of the Cake Tin at many times, but it's been an enjoyable one to actually get down there. Obviously, it's nice when you're going down there with family, meeting up with some friends and their kids, and my kids' friends are going along as well. It's just been a good season for Wellington and the Hurricanes, and I can't really speak too highly of it, to be honest. I'm glad it culminated in a trophy. So yeah, happy days, mate. Did you—I know you had a party Saturday night and didn't catch much of it—but have you seen some highlights?

Kelvin Davidson: Yeah, yeah, I was at a 40th a couple of doors down, so I had it going on my phone, but it's pretty difficult. You're not really paying much attention, you can't hear it, it's a small screen, and you're talking to people anyway. So it was more a case of I'd kind of glance over every five or so minutes and it had gone up in fives and sevens. So yeah, amazing. I'm the same—just a win for attacking rugby. We want to see tries, and I suppose there was always that possible concern in a final that it gets tight, and particularly with the weather as well, you kind of grind it out and there's a few penalties. But actually, yeah, to see that sort of score, I mean it's pretty mind-blowing.

Hopefully, that carries over to the test match arena. Maybe it won't, you know, but we'll see. And yeah, you'd think some Hurricanes will get rewarded with an All Blacks call-up in a couple of hours' time. So yeah, it's great, but gee, there's a lot of sport to follow, isn't there? The Black Caps obviously had a win overnight. There's a football World Cup, I'm always watching the NRL. Gee, it's great—it's hardly a big problem, is it? It's great to be a sports fan. So nah, stoked.

Nick Goodall: For you and I, it's certainly a good time because yes, it's just sport everywhere. I'm very happy to indulge in all of that. As I say, the Warriors down there in Christchurch—once again a sellout, and the crowd looked amazing, so that was amazing.

Great to see the Black Caps bounce back with that win too, and I just love to see our bowling lineup. It just seems able to put pressure on at every angle, right? And it's good to see Matt Henry get the rewards that he deserves as well—an 11-wicket haul last night. So yeah, it's brilliant.

And yeah, like I say, the All Blacks are named at midday today. So I'm intrigued to see how that one goes with which way the coaching staff is going to go, and just to see which Canes players maybe get rewarded from their form. Can they translate that? Do they want to play that type of rugby? Hopefully, something similar, but you never know. You're never sure it's going to work against the Springboks, but we've got a few games prior to that. I think it's France, Italy, and Ireland here in New Zealand, so we'll get to see what sort of blueprint they're putting together. But yeah, the games in South Africa will be very different.

And the All Whites this afternoon, too. So yeah, very much looking forward to that one. Iran drew with Belgium today, so I don't know, does that tell us that Iran is actually very good if they can match it with Belgium, who I think are ranked like fourth in the world or something like that? Man, I reckon we're a chance against Egypt. So I won't get too far ahead of myself, but given the way we played last week against Iran, man, if we can get a result against Egypt, it's all on for this pool. So yeah, fingers crossed.

Kelvin Davidson: Yeah, you know, I quickly saw that headline this morning. I'm not the biggest football fan, but you kind of know who's good and who's middle of the road, and it seems pretty open. A draw obviously opens it up for all the teams, so yeah, I'll be tuning in.

Nick Goodall: The best thing is I think it means attacking intent; you have to try and win that game. You win that game, you're going to be guaranteed to go through. So man, what a reward if you can win the game. Hopefully, we see the same attacking intent as the game against Iran, and hopefully Chris Wood and the rest of them all put it together and we can get a couple of other bangers. So yep, we'll be watching that with great interest. But all good, mate, that'll do us for today. Anything else on your mind before we close out?

Kelvin Davidson: No, that's it. Yep, another busy week, so let's get into it.

Nick Goodall: Enjoy your travel, mate. I know you've got a conference tomorrow, and you'll be in Wellington later in the week too, so go well on all those. I just want to say thanks very much for your thoughts, Kelvin. As I say, when we get deep into that economic stuff, it's always good to tease out all the thoughts in your brain, so I appreciate that.

And I just want to say thanks very much for listening. Please do get in touch with any questions or feedback. What's your take on where the economy's at, or what round of inflation are you seeing in your businesses? Please do let us know. But that'll do us for today. My name is Nick, he's Kelvin. You've been listening to the New Zealand Property Market Podcast. Mā te wā.

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