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If interest rates rise more than we think, bigger declines in house prices could be in the offing, writes Mark Fowler. Photo/Getty Images
Over the past 30 years, house price growth has always slowed when interest rates have risen, but higher interest rates have not always been associated with sharp declines in home prices. ‘real estate.
The difficulty to
drawing conclusions about house prices from past episodes of rising interest rates has been (a) the continued structural decline in interest rates and (b) easier access to credit, both of which provide a significant cushion to housing prices in the face of headwinds. The absence of a significant economic downturn after the GFC also clearly helped.
During the period of inflation targeting since the early 1990s, falling interest rates played a key role in fundamentally supporting rising house prices.
Historically low interest rates since mid-2019 have more recently been the main catalyst for a higher “ability to pay” for housing. The affordability of new mortgage repayments, however, is starting to flash red.
The problem of housing “affordability” in New Zealand has to do with the ever-increasing size of the down payment (relative to income) needed to buy a house. This is now more acute for first-time home buyers, ironically when the government has campaigned that this is the group they most need to support.
I suspect the Reserve Bank of NZ (RBNZ) is unlikely to continue raising the policy rate if the decline in house prices looks disorderly and/or if there are clear signs that the economy suffer unduly. In this regard, the 2018-19 episode remains fresh in spirit.
National housing prices stagnated from September 2017 to mid-2019. This is not because interest rates have risen nor has there been significant inflationary pressure – it is due to the tightening of credit conditions partly engineered by Australian banks, in the context of the Commission royal banking which takes place in Australia. The result was that the RBNZ was surprised at the slowdown in consumer spending growth at the time. The RBNZ then cut the cash rate in 2019 before Covid saw further monetary policy easing.
This is important because current market prices suggest that the RBNZ will continue to raise interest rates to fight inflation, but is it that simple?
The inflationary backdrop and the relative lack of spare capacity in the economy point to upside risks to interest rates. However, the magnitude of the declines in our “ability to pay” for the housing measure under the higher mortgage rate scenario suggests that the “pain” at the household level will be felt quickly.
Ultimately, the extent of house price weakness will depend on the extent of monetary policy tightening and the ability of the economy to absorb flow effects on consumer spending and inflation. investment in housing. If interest rates rise more than we think, deeper house price declines could be in the offing.
RBNZ Governor Adrian Orr was recently quoted as saying “we’re not in a good place right now” and “we’re going to need some support”. First-time home buyers probably feel the same way.
• Mark Fowler is Head of Investments at Hobson Wealth. This article contains market commentary and factual information only and does not constitute financial advice.