After reading the analysis from 3 of the major bank’s economists and because the Reserve Bank of New Zealand (RBNZ) have not ruled out a negative Official Cash Rate (OCR), it is reasonable to anticipate mortgage interest rates to drop. They are already at an all-time record low.
The question on everybody’s mind is; what does this mean for the property market. More importantly is now a good time to buy a house or should I wait for the big crash that everyone was talking about post the Covid-19 fall-out.
The first thing we should clear up is that the people that were forecasting a house price drop of up to 15% are all now eating their words. In order not to swing the pendulum of their opinion, they are using descriptions of modest decline followed by a recovery, or simply that house prices will be flat. Some economists are now predicting house prices to rise at a completely unforecastable pace over 2021.
If you read commentary by Ashley Church (and I do), he finishes his latest article in the most Ashley of ways. Always known to be ‘slightly scathing’ of the property crash club, he finishes with
“……if you’re one of those people who tells me that they’re waiting for house prices to drop before buying – good luck with that. Be careful that you don’t find yourself left behind in 12 months' time, wondering what just happened.” https://bit.ly/2FIIS0v
Having cleared up the expectation of house price drops that dominated the headlines just months ago, let’s return to the question about the effect of falling interest rates on the property market.
Simple economics tells us that as the cost of borrowing drops, house prices rise. Another factor to think about is that savings interest rates drop at the same time that mortgage interest rates drop. So not only is the cost of borrowing less, but so is the return on your savings. This is so emphatically true that the falling interest rates have caused the closure of a 50-year-old scheme known as Bonus Bonds. The scheme’s announcement goes like this;
“Low interest rates have reduced the investment returns of the scheme which affects the size of the prize pool. It has now become apparent those trends are likely to continue in the medium term. The Official Cash Rate, currently at a historically low 0.25%, may fall further in early 2021 as the global economy grapples with the impacts of Covid-19.”
“The ANZIS Board decided it is no longer appropriate to accept new investment into Bonus Bonds with immediate effect, and intends to start winding up the scheme no later than the end of October. Winding up the scheme includes the process of returning funds to bondholders. https://bit.ly/3ksxMvq
By the way, that’s $3.3 billion dollars that is looking for a new place for investment!
If you aren’t getting any significant returns on your savings at the bank, what should you do with your money? Many people will turn to property. As more people turn to property as an investment, there is an increase in demand. Another simple economics principle is that as demand increases, so does price.
So if you haven’t already answered the question for yourself, is it a good time to buy a house, in regard to house prices, the answer seems to be yes.