So, as much as I really want to believe, there are three reasons why I’m keeping my inner property bull at bay:
- In other countries where central banks have already dropped their rates, the property markets haven’t shown any noticeable uptick.
- When it comes to cash flow, buying is still significantly pricier than renting.
- Finally, we might be overlooking the other harsh realities a recession ushers in.
It’s somewhat depressing, but there’s a silver lining for both the upgraders and first-home buyers.
The Canadian experience
I can see parallels with the property markets of New Zealand and Canada, where demand is also fuelled by immigration and homeowners have a fervent zeal to move up the property ladder.
Here, as in Canada, borrowers usually opt for mortgage rates locked in for short stints, from one to five years. That means shifts in interest rates impact these markets faster and more significantly.
Unexpectedly, despite the Bank of Canada doing a double drop in rate reductions, property prices haven’t turned around. If borrowers feel the effects faster in places like Canada, then why haven’t two rate drops made a difference?
Maybe it’s like the brake pedal, where a couple of taps won’t stop the car instantly. There might be a big lag before the impact of tweaking interest rates truly takes hold. Or we may just need bigger moves.
Another reason I’m hesitating to be optimistic is that renting still looks a pretty good deal relative to owning. Owning a home is just too expensive.
Consider a new mortgage of $800,000 on a $1 million home. After insurance, maintenance, and mortgage payments, it might cost as much as $1400 per week to own.
The same type of property may only be around $750 a week to rent. If you’re just starting out in the world, it’s just not that compelling to be a property owner.
Ask yourself, would you pay an extra $650 each week to own a home that might still be falling in value?
After two decades of arranging mortgages, I’ve found home buyers choose to own over renting, as long as it’s not more than about 20% more expensive.
Interest rates would have to drop almost 2% more to get to this point. We’re moving in the right direction, but we have a long way to go.
Recession realities
Even if interest rates do have the most marked effect on property values, we mustn’t forget, as the saying goes, “it’s the economy, stupid”.
The Reserve Bank of New Zealand uses the OCR as a tool to both stimulate and reduce inflation. They give, and then take away. House prices? They’re merely a side effect. So, with rates on the decline, it’s a sign the economy’s in decline too, and that’s hardly a bonus for a balance sheet.
I think the Reserve Bank kept rates too low for too long, then let them stay excessively high for too long. If you’re following along, they’ll probably react too slowly during this phase, too, steering us into a recession gloomier and deeper than we really need.
But here’s a silver lining: the worse they make the economy, the deeper the rate cuts will need to be.
So, back to property values. Higher interest rates from the Reserve Bank have made property prices fall in many areas, and higher inflation over the past four years has significantly reduced property prices after the effect of inflation. Housing is still unaffordable, but now it’s because of the interest rates.
It may cost twice the amount to own than to rent, but that will change. It always does.
Let’s keep things in perspective and recall the cycle: when the OCR dips too low for an extended stretch, it boosts property values, then consumer goods, and lastly, wages. Following this, an OCR set too high for too long leads to business failures and job losses.
The debate on why central banks have this unchecked power is for another time, but the reality stands - they do, and this pattern can be useful in forecasting the future.
A mere 0.25% reduction in the OCR might not be enough to stop our economy from declining further, and evidence from abroad suggests the housing market could need even more substantial cuts.
Yet, as conditions worsen, the probability of these deeper rate reductions increases. The numbers really don’t stack up for home buyers right now, but they will again, and until then, this may be one of the last “best times” to get into the market.
As Warren Buffet says, we should buy when there’s blood in the streets. Home buyers need to get a strategy together then and hit those open homes.
As always, you should get financial advice for your personal situation before acting on anything in this article.
