New Zealanders bracing themselves for an interest rate hike last month had a reprieve after the country’s Central Bank put plans to raise the cash rate on hold. Its decision followed a resurgence of Covid that sent the country back into nationwide lockdown.
Up to that point, a cash rate increase of 25 to 50 basis points was a done deal, according to the financial commentariat.
In spite of the Kiwis’ ‘go hard and early’ lockdown policy of 2020, the economy there has been roaring back to life. Situations vacant advertisements have replaced welfare queues, as businesses struggle to plug skills gaps.
While the unemployment rate is down to just four percent, inflation is on the rise. The Consumer Price Index increased by 4.2 percent between April 2020 and April 2021. That’s the biggest rise in over a decade and it’s forcing the Central Bank’s hand. Previous plans to leave interest rates at their current record low until at least 2022 have been scrapped and the postponed increase is now likely to occur this month or next.
While it’s yet to be implemented, it’s already put a lid on property prices, which last year surged to record highs. Second-quarter 2021 capital value increases of 8-10 per cent have been tamped; so much so that Auckland is now looking at an annual growth rate of just 0.4 per cent.
It’s likely to be a similar story over in the commercial real estate sector, as buyers and sellers factor increased servicing costs into their valuation equations.
How well, or badly, will investors manage those increased servicing bills?
Interest rates have been at record lows for several years and that’s encouraged many borrowers to extend themselves; perhaps unsustainably so. If – when – the rates go up a couple of percentage points, some may have to liquidate. That could send prices lower and how much lower is anyone’s guess.
Will New Zealand’s experience be replicated in Australia? Economic conditions are similar and the country is in the grip of an unprecedented property boom.
Higher interest rates could see that change quickly and force those whose wealth strategies have been predicated on cheap finance to re-evaluate. In a rising rates environment, finding value and making money becomes trickier and some investors will struggle to rise to the challenge. Come 2022, banks and borrowers alike may need to buckle up for a rocky ride.