Will Rate Rise Slow Property Price Growth in New Zealand?

So, the Reserve Bank of New Zealand have gone and done it, they’ve hiked the official cash rate (OCR) up to 7.5% and in so doing they have lost a great deal of support from everyone from exporters to senior government ministers. 

The rate rise risks harming New Zealand’s primary industries, it has upset or confused The Council of Trade Unions, the Auckland Chamber of Commerce and even economic analysts at Infometrics…but will the rate rise slow property price growth in New Zealand as is hoped by the Reserve Bank Governor Dr Alan Bollard?

Most property and economic analysts are of the strong opinion that the OCR rate hike will actually have no significant short term effect on the housing market at all – which begs the questions why has the RBNZ pushed the rate up by 25 basis points at all, and what effect could this have on overseas investment into property in New Zealand? 

Looking at why the Reserve Bank took the rate rise decision first - on the one hand the Reserve Bank is trying to put the breaks on house price inflation as it runs away from affordability and creates the usual issues such as first time buyer frustration and excessive consumer spending.  And on the other hand RBNZ is trying to encourage the average New Zealander to save far more for their future - and therefore on the face of it at least, a rate rise is an effective measure to back each objective. 

I.e., higher interest rates can theoretically be passed onto the mortgage payer, take more out of the household budget, restrict spending and pour cold water on New Zealanders’ passion for property investment.  And higher interest rates can also theoretically be passed on to savers who will benefit as they save more because they will then have the potential to earn more…

…However, the New Zealanders’ love affair with property is not going to be deterred so easily and where money is banked in property it is not available to be banked in a plain vanilla savings policy (which can be taxed and therefore enjoyed by the government as well of course!)

The Reserve Bank’s OCR rate rise was anticipated, even though much media coverage is giving weight to the incredulity expressed by many organizations as to ‘where this rate rise decision can possibly have come from’.  And because the rate rise was anticipated there has been a strong and steady consumer flow away from floating rate mortgages to mortgages with around five years of fixed rates of interest - and this is the primary reason given by the analysts that we spoke as to why the rate rise will not slow property price growth in New Zealand.

Banks had already factored in an increase when fixing their rates of interest and so the majority of homeowners who have fixed rate mortgages will see no change in their monthly mortgage outgoings and so will not be affected at all by the Reserve Bank’s rate rise.

So now RBNZ has done what it can with the OCR it has announced that it will have to look at alternative methods for restraining house price inflation – and this is where the other question posed above needs to be discussed further, namely ‘what effect could [the rate rise] have on overseas investment into property in New Zealand?’

Overseas investors currently enjoy their profits from property in New Zealand capital gains, value added and stamp tax free, therefore the market has seen a strong inward flow of international investment…many politicians as well as the Reserve Bank of New Zealand are of the opinion that this freedom for overseas investors to profit from and inflate the market should be capped in some way. 

RBNZ has gone so far as to state that it isn’t looking for the government to implement capital gains tax on investment profits but that in some way profiting from speculation should at least be less tax effective – the good news is though that until measures are taken to cap the taxation attraction of the property market in New Zealand it will likely remain attractive for overseas investors and the rate rise will certainly not deter interest from international buyers.

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