O L I V E R W O O L L E Y
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Project 1, Post 1.
Article: Dangerous
Heights: Interest rate peak poses big risk. By Brian Fallow.
This New Zealand
Herald article, released on 22nd of April, forecasts the affects of
the latest rise in interest rates on the New Zealand property market. The rates
are said to be peaking at a rate the Reserve Bank deems ‘neutral’, meaning they
are neither stimulating nor restraining on the economy. The neutral OCR rate could possibly peak above the predicted 4.5
percent depending on inflation rates.
ASB economists say the effects of the increased rates could see first-home buyers in Auckland spending two-thirds of household
income paying the mortgage (Fallow, Dangerous heights: Interest rate peak poses big risk) . The article
exclaims while there has been high levels of debt burden, low interest rates
mean that the debt servicing costs have also remained low. With the large
amounts of debt and increase rates now on the rise it is inevitable that the
debt service costs relative to income will rise simultaneously. The OCR
(official cash rate) change will be seen in the mortgage holder’s debt
servicing costs, the increase of the OCR to 4.5% only bringing up these costs
‘moderately’ (Fallow, Dangerous heights: Interest rate peak poses big risk) . “However,
the impact on the affordability of new house buyers will be quite pronounced
and effective in containing house prices and the flow-on effects from the
housing market to inflation.”
Figure 1: Fixed-term home loan interest
rates.
The Kiwibank, along with other banks, has
increased loan rates in anticipation the Reserve Bank will increase the OCR
from a record low of 2.5% to 3% on Thursday the 24th (Vaughan) .
The changes in fixed-term home loans can be seen in figure 1. The effects of
these increased rates will be felt by those looking to invest in the property
market, with homebuyer’s debt to income ratio coming at a new all time high (Fallow, Brian Fallow: Four reasons not to panic about a property bubble) . “The level
of debt, the legacy of the mid-2000s boom, has the effect of lowering the pain
threshold -- so that interest rates will not have to rise nearly as far in this
cycle to get the attention of the mortgage belt, which is good for business
borrowers and the exchange rate (Fallow, Brian Fallow: Four reasons not to panic about a property bubble) .”
Decreased demand, price and sales for housing
are some likely outcomes set to hit the market in wake of the interest rate
rise (Verdon) .
Outcomes that could see the end of the Auckland housing boom (Verdon) .
“Mr Dickens, managing director of Strategic Risk Analysis and a former Reserve
Bank economist, correctly predicted the last slump in house prices in 2008-09,
and believes a combination of higher interest rates and government housing
initiatives will end the boom (Verdon) .”
Further possibilities resulting from the increased interest rates following a
period of relatively low rates, is the deflation of asset prices (Fallow, Dangerous heights: Interest rate peak poses big risk) . This is one
of the reasons the Reserve Bank has begun raising rates.
In regards to Welly Real Estate the outcomes
of increased inflation rates are in general not beneficial for the company. Decreased
demand and house prices are two major factors concerned with the company. The
increase in interest rates will in turn bring down GDP also having a negative
effect on the company, as less people will seek to buy property. Although there
are many negative outcomes, possibilities such as a shift to the rental market
for consumers in the property market, may benefit Welly Real Estate.
My advice for Welly Real Estate to avoid
damage from increased interest rates would be to shift their focus to the
rental market in order to maintain sales volumes and net income. Focusing on
the rental market would be deemed safe as buyers are not as affected by
increased loan rates, meaning consumers in this market will continue to invest
in property. With house prices also set to decrease with the possibility the
housing boom may come to an end, I would suggest it is a good time for the
company to encourage buying or renting property before the affects of increased
interest rates are felt. Doing this will help to mitigate the for coming
decrease in demand for housing. As explained by Brian Fallow it is a good time
for business borrowers, this may mean an increase in demand for commercial
property as businesses choose to expand. This leaves a simple solution for
Welly Real Estate; allocate their labour towards the commercial market,
generating a higher profit in this area and hopefully a higher net profit.
Works Cited
Fallow, Brian. Brian
Fallow: Four reasons not to panic about a property bubble. 22 April 2014.
22 April 2014
<http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=11242228>.
—.
Dangerous heights:
Interest rate peak poses big risk. 22 April 2014. 22 April 2014
<http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=11241862>.
Figure 1:
Vaughan, Gareth. Kiwibank
increases 1 to 3 year fixed-term home loan interest rates. 22 April 2014.
22 April 2014
<http://www.interest.co.nz/news/69549/kiwibank-increases-1-3-year-fixed-term-home-loan-interest-rates>.
Verdon, Tony. Rate
Rise 'May Finish Boom'. 10 March 2014. 22 April 2014
<http://www.nzherald.co.nz/property-report/news/article.cfm?c_id=1503327&objectid=11216840>.
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