So Dermot, what the hell have you done to the housing market ?

Yes, this has been the constant refrain from vendors for the last three months now

My response after looking at all the data is that,  “ It wasn’t me ! “

You may have heard many theories on why the market has dipped, and indeed why certain segments of the market have been hammered in recent times

These reasons range from Immigration, Emigration, Oversupply of housing stock, Banks not lending, COVID, Taxation policy and so on….

However, let's be clear, the primary driver by far in this current correction is the increase of mortgage interest rates from circa 2.5% late last year  to 5% + currently.

In simple terms this has doubled the cost of capital, effectively reducing the ability of borrowers to raise loans and this in turn has pushed down the demand and value of the assets they have sought (in our example this means property)

Why doesn't the Government just significantly lower interest rates ?

Sadly this is not going to happen for some time, NZ and the world, during the COVID pandemic lowered interest rates and printed lots of money to stimulate economies, this worked far too well and we were left with rampant inflation increases which had to be bought to heel.

By increasing interest rates (The Reserve Bank uses the OCR to achieve this) we as consumers are forced to stop buying new boats and cars and need to divert our hard earned cash into repaying ever more expensive mortgages, this reduction in demand of consumer goods leads to downward pressures on prices which leads to hey presto - lower inflation !

It is a blunt instrument (OCR) , granted,  but it has proved successful in managing the economy for many decades now.

By increasing the rates rapidly now the Government is left with more room  to play with in at a later date should they wish to lower the rates again to battle, say, a pending recession.

So, in summary, expect a couple of years of interest rates at around these levels (hey if you are old like me they still seem pretty good compared to the 1980’s,  20% + mortgage days)

Stop buying stuff you don’t need and invest in proven assets that appreciate over time - like property.

Dermot Kelly

The Unitary Plan Man ®