For the past thirty years there has been a strong correlation between property prices and interest rates. As interest rates fall, property prices go up. So, as interest rates continue to fall, property prices could potentially increase further. My view is that won’t happen. Credit criteria is still tight and will restrict how much can be borrowed. We also still have LVR (loan-to-value ratio) restrictions impacting on property investors and foreign buyer rules reducing foreign investment into property. All of this is a headwind against further price increases.
If anything, lower interest rates simply reduce the risk of prices falling. House sales volumes are still near the same levels as they were during the GFC, and in Auckland are down 30% over the past two and a half years. Lower sales activity in any other market would result in significant price falls, however sellers are not desperate and rather than lower price, simply take their property back off the market.
We are at full employment and there is a general shortage of property that has resulted in high demand for rentals. With lower interest rates and higher rents, investment properties are becoming more cashflow positive and therefore easier to hold long-term.
My observation is that investors realise property prices are still high, and that there are still plenty of risks that could trigger a market correction. The China/US relationship and New Zealand being forced to pick a side between the US and our biggest trading partner is an obvious example.
Lower interest rates just make the world feel a little less risky. Here’s my final point: we already have $270 billion of home loan debt. That’s a lot of debt that needs to be repaid, no matter what the interest rate is.