Falling interest rates alongside a lower exchange rate and increased fiscal stimulus should have a positive impact on economic growth - provided firms and households do not unnecessarily contract their spending. These reductions are certainly positive for the New Zealand property market, but the question is how responsive will buyers and sellers be to these cuts and over what timeframe?
Without doubt, the rate changes are a boost for property investors, but this should not be overstated - as the resulting impact could take some time to be felt. The trickle-down for the property market may not be witnessed for 6-12 months into the future.
Even then, economic activity may initially be unresponsive to the most recent announcements, making further action warranted. However, the Reserve Bank may be trusting that two deep consecutive cuts of 1.50% will generate a quicker reaction than their customary 0.25% movements.
Vendors are certainly hoping that these cuts will spur on an increase in purchaser activity and thus lift the market. In commentaries to our clients I have referred in previous months to the lack of transactional activity in the industry, with the market characterised by widely varying opinions of value. Granted, as interest rates fall, investors may look to property to enhance returns in their diversified portfolio, as yields are starting to appear attractive in comparison to a cash return. In previous downward cycles such as we experienced at the start and the end of the 1990's, 90-day bank bill rate was reduced by half. But according to CB Richard Ellis research, average property yields continued to climb both during and after these reductions, evidencing that property yields can still continue to rise, even when interest rates are falling rapidly. Right now the power certainly remains with the purchaser. There continues to be risk in the pricing of assets, with buyer confidence more likely to resume when official interest rates appear to have bottomed out and the markets eventually stabilise.
This will be the signal to investors to lock-in funding rates, price individual property risk (such as location, tenant covenant and construction) and demand the asset class again. We expect this cycle to be no different from those previous in this regard.
The greater the cumulative reductions, the more attractive property yields will appear - but it may not be until the cuts end (or at least slow down), that transactional volumes return. How long interest rate cuts will continue depends on how unfavourable economic conditions become. The Reserve Bank certainly hasn't ruled out further adjustments; however they did suggest that any further changes will be smaller than those seen recently
In the meantime, property prices will continue to correct as sellers are forced to de-leverage their positions. In the short term, prices are expected to continue to fall, but in the long run they will provide an incentive for buyers, when they are ready, to re-enter the market.
Ultimately the official cash rate is but one of a number factors influencing the future outlook for property, with management, competing supply, tenant demand, vacancy levels and therefore rental levels, all major factors to consider.
For existing holders, property remains a long term investment and it is challenging to quantify how much the eventual value correction may be. However, well located investment property, housing financially stable tenants, will always yield favourable comparative returns in the long term.
Read the full article here.