Rising Interest Rates and Falling Property Market

As I write, interest rates are rising and property values are falling. While for many, all they can see is unending doom and gloom, in this article I take a closer look at what it really means for property investors. 

Firstly, we’ve seen this all before, although admittedly it has been a while since the last downturn. Increasing interest rates and decreasing property prices are part of the typical cycle that the property market goes through – boom, downturn, bust, recovery, and back to boom again. 

However, in a downturn/bust phase, people start to become alarmed, foreseeing a market that will keep going down and never recover (and this is typically fuelled by negative sentiment in the media). The trouble is, everyone tends to look short term. I've looked back over 45 years in New Zealand housing and can’t see a single correction that didn't fully recover to former peak value within 5 to 7 years. So the doom and gloom phase tends to be fairly short lived in the grand scheme of things, and over the long term, property values continue to rise.  

What has happened in the past, and what I expect to see happen again this time, is that as interest rates go up, people will panic and sell. Or, if they are highly geared and tight for cash flow, some will be forced sellers. However, as the saying goes, out of adversity comes opportunity, and some of the best deals in housing get done in such environments. But you need to keep a cool head while everyone else around you is having conniptions. 

Why is it a challenging time for property?

Much of the current pressure on property owners comes from imprudent tax rules, including loss ringfencing, interest non deduction, and the 10-year bright-line rule. (You can read more about these tax rules on our Tax Changes Resources webpage.)  Of course tax rules will likely change in 2024 if we get a change of government (both National and Act have said they will repeal interest non deduction rules, for a start). It will be interesting to see what the Nats do if it's their turn in government.

On top of unhelpful tax rules, we have a Reserve Bank governor who oversteers the economy, reacting violently to market conditions (e.g. lowering interest rates way too far in response to Covid, and is no doubt now in the process of increasing them too fast and too high in an attempt to curb inflation). As I said in my July 2022 article:

Waving the flag of inflation and monetary policy, this RB and the Government will (in the next 18 months) destroy the lives of many fledgling homeowners, as interest rates skyrocket from 2% to the 6s and possibly 7%+ range. Could this government and RB have set these people up to fail more, having been enticed with low rates and loose credit, and then smashed with rapid increases? It’s not the banks’ fault; it’s erratic governance from the RB. Give it six months, and nearly all the short-term fixed rate agreements will have expired, and the pressure will be peaking.

In my view, we find ourselves in such a mess because the government changed the Reserve Bank’s mandate to look at things traditionally managed by politicians. Climate change, employment, and housing volatility are now on the Reserve Bank’s agenda – and these policies can conflict with inflation policies. It’s little wonder, given how close Adrian Orr and Grant Robertson appear to be, that our RB governor was in Zurich two weeks ago giving a speech describing the RB as Tane Mahuta – legislation being the roots, the sap being the money the RB prints, the trunk being payment systems allowing the money to flow to the branches which represent financial institutions. Does this woke narrative have a relevance in international banking? Is this serving New Zealand’s reputation as a modern stable banking environment, or making us look like a an economy under siege by ideologues? I would prefer he became famous for his focus on banking and inflation, than being the most woke RB governor in the world.

(You can read my full article here: https://www.gra.co.nz/articles-by-matthew-gilligan/property-market-the-labour-government-the-reserve-bank) 

What does the future hold for the property market and investors?

• It’s a good time to buy because you can often get great deals from vendors who are keen to sell and exit the “failing” property market.  Then you can take full advantage of the increase in values when the market returns to the recovery/boom phase (which it will).
  
  
• It will soon be a better time to build, as builders will be short of work in 2023, with reports of declining and cancelled forward construction projects circulating in my client base. The middle of a recession can be a great time to build because costs actually go down. It might not feel possible in 2023, but inflationary pressures are coming off residential construction (from anecdotes I hear from my clients).
  
  
• Don’t panic – if you can afford to hold on to your properties, keep them. Take a long-term view, as in 10 years’ time values will not only have recovered, they will be significantly higher than they are today.  
  
  
• The most active stimulant in the housing sector will be the Kainga Ora-Kiwibank First Home Loan initiative, designed to help first home buyers purchase a home with just 5% deposit.