High prices, low interest rates
Low interest rates are now the ‘‘new normal’’ – a structural shift that may have permanently disadvantaged people who are not already property owners, economists say.
While it is common to hear about the bank interest rates on offer being at ‘‘historic lows’’, they are back at a level that was common until the mid-1970s.
It is only over the past 40 years that interest rates above 5 per cent have become the norm.
Economist Shamubeel Eaqub said interest rates would be low for decades to come, and the recent period of high inflation and interest rates could end up being seen as the anomaly.
He said current high levels of debt compared to gross domestic product gave central banks a big incentive not to raise rates.
‘‘The higher your debt the less interest payment you can carry,’’ he said. ‘‘We’ve never been in a position where the price multiples across so many asset classes are so overvalued and there’s so much debt.’’
Tony Alexander, BNZ’s chief economist, agreed. He said the period between the 1970s and 2007 could end up being seen as an aberration as the world’s economies returned to the low inflation and low interest rates that had been seen for hundreds of years beforehand.
Alexander said that would make people more willing to take on debt and to pay higher prices for things such as houses.
Recent house price increases across the country were a ‘‘repricing’’ to take into account the low interest rates that made borrowing cheaper for buyers, he said.
‘‘There’s been a structural shift in house prices. If you say compared to income they are too high that’s completely irrelevant because you’re usually comparing it to periods where interest rates were much higher.’’
Lower interest rates would rule a line under how much room there was for house prices to fall, he said.
Those who were most affected by the ‘‘new normal’’ were people who were late to the housing market because prices had already risen to reflect the new reality of low interest rates and those who were trying to live off their savings, he said.
People with money in government bonds and term deposits were earning very little.
Many were instead looking to purchase rental properties, which they planned to hold for the longterm to generate rental income, he said.
ASB chief economist Nick Tuffley said, even if inflation picked up again, central banks would find they did not need to raise interest rates by as much as they had to before the global financial crisis, to get the same impact.
But Gareth Kiernan, of Infometrics, said while it was possible that the recent increase in house prices was a structural shift in some markets, places such as Auckland and Queenstown still seemed vulnerable.
He said when prices were too stretched above incomes, there was less ability for the market to absorb even a small increase in interest rates.