Last week we witnessed the first increase in the OCR since July 2010 when the rate was then raised from 2.75% to 3.0% - that change was short-lived as in March of 2011 it was dropped to 2.5%; a level it has maintained since.
The fact is that the current levels of interest rates, which have been pretty much stable for the past 5 years represent an unprecedented period of low interest rates.
A quick look back in history shows exactly how the past 5 years contrasts with the volatility of the past 50 years.
Historically mortgage rates have experienced typical cycles of rises and falls, especially over the past 25 years, with rates topping 20%+ at the end of the 80's.
To put that into perspective a 30 year mortgage for a median priced $415,000 property which today based on an 20% deposit costs $1,948 per month would cost $4,198 at 15% mortgage rates and a staggering $5,684 per month if we were to experience the 20.5% mortgage rate of June 1987 again!
We are certainly going to have to adjust our expectation as mortgage holders to paying more a month in the coming years as the trend is upward.
The recent 0.25% increase added $53 to the monthly cost of a 30 year mortgage of the median priced house.
Of equal concern to most home owners with a mortgage is the likely impact these rises in mortgage rates will have on the property market, both in terms of levels of activity and price.
While data from the Reserve Bank on interest and mortgage rates goes back 50 years the data on property sales and prices from the Real Estate Institute only goes back 20 years, however the past 20 years does provide us with some valuable data as to the property cycles of the period for analysis.
The chart above tracks floating mortgage rates since 1992 and as highlighted by the coloured sections, this timeline does showcase some parallel periods of rate changes which can provide a basis for analysis.
Rising interest rates - The red sections "A" - this occurred between March 1994 and September 1996, a period of 31 months. A similar rising interest rate period was from October 2003 to July 2008, a period of 58 months.
Falling interest rates - Green section "B" - this occurred between April 1998 and August 1999, a period of 17 months. A similar falling interest rate period was from August 2008 to July 2009, a period of 12 months.
Volatile interest rates - Orange section "C" - this occurred between September 1999 and December 2001, a period of 28 months. A similar period of volatile interest rates was from February 2002 to September 2003, a period of 20 months.
So taking these three defined parallel periods of activity it is very interesting to see what happened to property sales volumes and prices during these times.
Rising interest rates
The impact of these rising interest rates spread over 3 to 5 years was to depress sales as the chart below shows. It is somewhat striking to see the degree of correlations between these two discrete periods. The period in the 90's did see some recovery towards the end of the period but the first 12 months was generally depressed. In the case of the 2000's the long term impact (heavily influenced by the GFC) was a significant depressing of sales volumes.
When it comes to property prices as measured by the median price the trend across these two discrete periods again shows a high degree of correlation. Both periods witnessed a decline in the growth of property prices. It was only towards the end of the 5 year period in the last decade that prices actually went into negative growth.
Falling interest rates
The two periods in which interest rates fell were short-lived, representing just 17 months in the end of the 90's and just 12 months in 2008/9. Both of these periods came about as a function of the necessary reaction of the Reserve Bank to external stimuli - in the late 90's it was the Asian Economic Crisis and a decade later the Global Financial Crisis.
The impact of these significant cuts in interest rates was to stimulate property sales as the chart below shows with again a striking correlation between the two discrete periods.
When it comes to property prices the fact is the data shows that the falling interest rates aided the stimulation in property prices. In the most recent period of 2008/9 dragging prices back from actually falling, whilst in the 1998 period it managed to stave off what could have been and was very close to falling prices.
Volatile interest rates
These instances occurred during the early years of the last decade and were triggered largely by global economic events. Clearly this degree of rising and falling rates can lead to uncertainty.
In the case of property sales, volatility in interest rates seems to establish no clear correlation between the two periods nor in fact any clear direction of the market. The earlier 1998/9 period saw sales fall and then recover, almost in line with the interest rate hike and then cut; as for 2002/3 sales fell but with some rebound.
As to property prices during this volatile period, again as with sales volumes the correlation between the two periods is not clear and the trend seems to show no significant movement up or down. The 2002/3 period did see a very marked rise after 12 months as interest rates fell; this was though the beginning of a very strong bull run on prices through to 2007.
So while by no means scientific, there is clear data to support the view that the occasions when interest rates are rising is a time when property sales ease and prices slow; while interest rate cuts stimulate property sales and inflate prices.
However uncertainty in interest rates tends to leave the market marking time.
With the Reserve Bank clearly signalling that we are about to experience a period of 2 to 3 years of interest rate rises it would seem to be fair to say we will see sales volumes ease and price growth slow.
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The above article was written by Alistair Helm, and is republished with his approval. The article was originally published on Properazzi here
32 Comments
Funny how none of the property spruikers like big daddy and SK have commented on this article. Probably because this guy knows what he is talking about and what he is saying cannot be denied. History tells us that as interest rates rise the property market will slow down and if they go up high enough prices will drop even. Olly will disagree but of course he will as his business would be destroyed if he said anything slightly negative about property. He has to always stay positive to keep his clients happy as they pay him fees.even if interest rates were 20 per cent he would say all the right things to keep that income flowing in .Just remember how much money he lost for people over Landmark. But of course he has paid them back their losses from his recent success.
zz get your blinkers off. As a spruiker you have completely missed the point as always. We are not talking about rent increases. He is talking about the housing market slowing down. Less sales. Something you possibly have never experienced . No markets go up in a straight line. My experience over thirty years. As interest rates go up houses drop in value . No one ever talks about inflation on this site as if it does not exist. In real terms when you add in the effects of inflation values of houses in Auckland have not risen as much as some people say.
What sad failure to understand.
Except tenants in a macro sense often cant pay anymore. If it was as you suggested rents wouldnt effectively have been flat for 5? years, excepting chch of course.
Second, if you get more out of the tenants that means with no more money they spend less elsewhere, that is deflationary in other sectors, overall zero effect.
regards
you are partying a decade too late
http://www.zerohedge.com/news/2014-03-19/music-just-ended-wealthy-chine…
http://www.zerohedge.com/news/2014-03-19/chinas-minsky-moment-here-morg…
As I said this is not an article about rent increases. It is about property values. They will slow down volume wise and price increase wise. They might not beat inflation or they might drop in value. Anyone who says a drop in value does not concern them is a liar . Especially leveraged investors who need gains to offset their actual losses.
As I said this is not an article about rent increases. It is about property values. They will slow down volume wise and price increase wise. They might not beat inflation or they might drop in value. Anyone who says a drop in value does not concern them is a liar . Especially leveraged investors who need gains to offset their actual losses.
Here is something interesting I heard the other day on Duncan Garners show on the radio. He was interviewing the head honcho of Barfoot and Thompsons and asked him for a bit of a breakdown of who was buying Auckland properties. Now these may not be the exact figures but they will only be out by a percentage point or two.
He broke it down something like this, Europeans about 47% Asians about 43% and Indians etc made up the rest. That's funny, I thought, I was sure the population of Auckland is approxiamtely 20% Asian, and correct me if I am wrong, I think that may INCLUDE people from the Indian sub-continent.
I reckon that guy, right there, pretty much let slip how much property may well be being sold into foreign hands, and dollars to doughnuts it is, in Auckland at least, a darned sight more than 12%
Given there are similar effects being seen elsewhere in the World's capitals its hard to believe we are not seeing a significant increase here, especially as its supposed to be easy for rich "business" ppl to buy their way in.
Great thing about owning a house from cash is there is no evidence/paper trail...
regards
At the start of the first hiking cycle, in 1994, the Auckland median multiple was around 3-4x, and in 2004 was about 5-6x. At the start of this hiking cycle we are looking about 8x in Auckland. A greater proportion of borrowers are floating or fixed for shorter terms. Record low rates are one of the key reasons prices have been able to get as high they are.
Demand from foreigners and local investors will provide some support to prices, but how keen will they be to buy into a 3% yield if prices are flat or falling? Capital gains are the only game in town especially as rates rise.
I'm picking on average this cycle will shake out worse than previous cycles, but without any kind of crash given immigration levels and foreign purchasers. Throw in a major economic shock and all bets are off.
Interesting stuff ZZ. I'm trying to decide whether to leverage into property of just get a gold hoard. I can't bring myself to look at areas with poor school zones which IMHO seem vastly overpriced here in Auckland. That's why I'm looking at second tier cities like Tauranga which seems a likely destination for baby boomers. This is kind of consistent with what Simon was advocating below. Perhaps I'm guilty of failing to see opportunity in Auckland. I just think about the price, rental return, school zones, proximity to beach and shops. In every respect Tauranga, Palmy, ie second tier cities seem to beat Auckland hands down value for money. I guess those areas don't have income earning potential to back up the rents. But then again does Otahuhu.
ZZ I think gold is more than speculation. It's elemental wealth that is not subject to inflation. Unlike property gold is a hedge against a falling New Zealand dollar. Look what happened to the gold and the NZD in the aftermath of the GFC. I hear what you're saying about property and I'm considering it, but there are still scary looking clouds on the horizon. Even if you discount the possible / inevitable collapse of the US dollar, What happens if the NZ government decides to wind back the 1.6 Billion pa accommodation supplement, or if they decide to fix the declining home ownership stats by changing the asymmetric investor vs owner tax law? Just saying..
Fo the mortgage rates graphs, I think rising really needs to be defined as when it is beyond the volatile range since people didn't have foreknowledge that rates would continue to rise- had rates turned down the second A period would have been defined as another volatile one so the start of the rise should be part of the volatile zone.
One way of checking "is this now doing something different" I've used on occasion is you make a line of best fit on some historical data (like, in this case 99-04) with (critically) an error range if the line breaks out of the error range, that's the point you can justifiably say, without foreknowledge of what happens next, something different is going on.
Europe and the US are still looking pretty sick and then there is the looming crisis in China. How is it that NZ can be the only western economy to put up interest rates - is our economy really that strong - I doubt it. If anything the Reserve Bank may have to reverse the recent OCR increase and if the banks want to have any ongoing demand for mortgages they may have to be prepared to cut their margins until the OCR is slashed once again. Seriously does anyone think our economy can handle interest rate increases and dollar for dollar exchange rate with the $Aus?
Bigblue - problem is, yes those risks have been around for the past couple of years and nothing has happened to adversely change NZ's economic direction, hence a 3.5% current growth rate that some forecasters are looking to move above 4% in the next 12 months. The danger is in expecting the RBNZ to "live in hope" that one of these actually eventuates that reverses NZ's positive outlook and increasing inflationary pressures. If that does happen, yes they may well cut, or at the least stop hiking, but I feel for anyone who is themselves relying upon such as event to bail themselves out of a hole. And yes, barring such an event, hiking rates back to 5.00 - 5.50% (probably 7.50% mortgage rates), where we used to cut them down to in tough times, will not for the slightest moment in my view substantially hurt the NZ economy - but it will hurt the over-leverage who has taken no precautions and are hanging out for an event.
The USA is bankrupt. Tapering will taper. UK is only booming in property & London high finance, Australia has bogged down, China has an unsustainable command economy. Whether NZ property pops or keeps rising..... interest rates globally will be zero in perpetuity. NZ OCR will be down to 1% before long.
Whatever you do, don't fix for more than 12 months
Combined with most Arab Middle East countries being completely broken and beyond repair. Their governance is unsustainable. When Muslim extremism and antisemitism breaks out largescale against Israel with assistance from Russia & Pakistan & Iran then worrying about NZ property prices will be way down on the priority list.
Global economic recovery?
Grant A. Do you think inflationaly pressures are the greatest threat facing NZ? We're currenty walking a tight rope between a high NZD and high milk solid prices. Meanwhile the Ywan, USD, Euro, and Yen are all fighting a currency war to competatively devalue their dollars and stimulate growth through export. What is that going to do to Fonterra and our Tourism industry in the long term.
I wish someone would say what's really going on. This article completely ignores the elephant in the room, the house price explosion which occurred between 2002 and 2006. Take a look at the stats on this website http://www.landlords.co.nz/housing-statistics
That was caused by monetary easing by the Federal reserve chairman Alan Greenspan and followed by by Ben Bernanke. If this article proves anything it's that our domestic interest rates are completely decoupled to house price inflation. Why? because our houses are a global investment commodity just like gold which similarly appreciated over the same time period.
Now fast forward to now. A currency war and the gruesome specter of a collapse of the USD, bond market and derivatives market. Foreigners are rushing to safe havens like property which explains the asian buying frenzy in Auckland. Now lets use that as a premise to start from. What policys should we as a country be employing, What as individuals should we be doing to protect ourselves.
I think it's anyone's guess about where rates are going.
Too many problems. The FED's, EU & Japan rates are going to stay low - so there will be pressure to keep ours down as well. But that fuels the housing market, and global instability is only going to get worse in the coming years. How long before some idiot in the Mid east turns sand into glass?
Yalta in the crimea has a lot to answer for - 60 years ago, and now again. Europe is well overdue for a major war. No matter how much land the arabs have, they'll always want a bit more, and as Israel starts to become an energy exporter, so the balance of power is going to change significantly in the next 5 years or so - maybe sooner. Nuclear Russia, siding with nuclear Iran, won't be keen on the new Israelie gas feilds exporting to europe.
As the USA & EU collapse, so the kiwis will come home to safety, and so will a lot of others who have money and want to escape the coming chaos - look at the number of foreigners buying into middle earth.
So more upward pressure.
We are in the best place globally - but it's going to be an exciting ride. And we're going to need more houses.
Some people will suck up to any political entity to maintain the status quo.
Some people will take the German viewpoint, even a Chinese one, even a Russian oligarchs shakey hand, just to maintain their political viewpoint and their current and currency investments.
The point of view of all these people is to maintain their current position, otherwise they would fail badly, in my estimation.
In my estimation, most of these people will suck at doing an honest days work for an honest days pay.
If the rules were different, an honest days work, would beat a dishonest politicians payday deal, with just about anyone, I care to name, but prudently cannot.
It would be a crime here to do so.
It would also beat a rentiers property porfolio, but once again, I prudently cannot name names, as the rules are only in favour of the shirkers, not the workers and I include lawyers, who work the system, not improve it, on that score.
In my estimation New Zealand has in the past few days, exceeded and surpassed all bounds of proprienty and grovelling and flag waving, to milk the system for all it is worth.
In fact, they are up with a Middle Eastern entities, oily grip on their beleagured country, ie, very slippery, in deed and action.
In my estimation, some people will crawl into bed with just about anyone, these days.
And if you think this is about sex, then you have a mind like a Kaipara sewer, or cannot see the wood for the smog laden trees.
Why do you think, there are rules for taxing some and not others, why some live a tax deductible lifestyle of the landed gentry, whilst others live in a poverty stricken lifestyle.
Why do you think there are rules of taxation, that you could drive a Ferrari down State Highway upgrade through, or even through a Chorus of crony capitalistic endeavours.
Why do you think a Council permit costs an arm and a leg for some, but some people, cannot even afford a shack to sleep in, at any cost, to themselves, their families and the taxpayer on a 10k section.
Rules and rulers, hand in glove, hand in pockets, mostly each others.
Some people would call it corruption, by any other name, any other country, it might be true.
But I cannot possibly comment, as one political man once said to another.
What to do as an individual? Hedge.
Not owning any property in a country like NZ is extremely risky. The opportunity cost can be extremely punishing.
If you've sat out and missed the auckland price move, then you need to start looking at secondary cities and buy something that yields at least 7% (which you won't find in a landed property in auckland).
Then lock in 3-5 years at around 7% and if you are close to breaking even then great, you have low cost skin in the game in the likely event of further price rises, particularly in these secondary cities from the wealth effect spreading beyound auckland.
For the record, 2004-2007 saw 20% p.a price gains in palmerston north after much lower price moves in the 2000-2003 phase when auckland was booming. I think chances are we will see something similar again
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