With interest rates probably unable to go any lower and hikes possibly on the horizon, a prominent economist is warning property owners they might soon actually have to "do stuff" to make a living.
The rapid rise in property values in recent years has been at least partially attributed to low interest rates, with the cost of borrowing lower than ever. Last year, despite the Government having to spend billions to keep people in work as the COVID-19 pandemic hit, residential properties increased in value by double-digit percentages.
The Reserve Bank has kept the official cash rate (OCR) at a record-low 0.25 percent, its primary goal being to keep inflation under control. Some economists have called on the Government to step in, Shamubeel Eaqub for example saying it was enabling a "huge ponzi scheme" in the housing market that was "ripping apart the social fabric of New Zealand".
Finance Minister Grant Robertson in February told the Reserve Bank to at least consider the impact its decisions have on house prices when setting monetary policy.
Economist Cameron Bagrie on Tuesday told The AM Show the OCR probably isn't going to hit zero or go negative, as it has in some countries.
"I think we've reached the trough... One of the big defining trends for the past 30-odd years has just been low and lower lows for interest rates. They've gone up on occasion, but generally the trend has been your friend and the trend has been down," he said.
"That's been a big driver of wealth creation, it's been a big driver of asset prices moving up - we're not just talking residential property prices here, we're talking farm values, we're talking commercial property, we're talking business values as interest rates have plumbed lower lows.
"Interest rates I don't think are going down from here."
That means future moves will be up, which will make borrowing more costly. This could potentially stop the rise in asset values, including property, and perhaps - as bank Westpac is predicting - send them backwards.
"The so-called wealth effect is a pretty big driver of spending - you feel wealthier, you're gonna spend a little bit more of that dough, that goes into the spending side of the economy and that creates jobs," said Bagrie, "but the big picture here is pretty simple. What happens if we take out a big driver of that growth, which has been lower and lower interest rates? That's been a huge tailwind."
Low interest rates can drive inflation up - more money borrowed is more to spend, meaning each dollar is worth less, reducing spending power.
Without being able to rely on asset price growth, Bagrie says Kiwis with money tied up in property will need to look elsewhere to make a buck.
"It's got to be what's called real wealth creation - real value-add, making and doing stuff as opposed to just watching the asset prices move up. What are we going to need to get that model going? We're going to need far better fiscal policy, Government policy - creating an economic environment where people can get ahead... We're going to have to look at those other things that are going to drive the economy, they're going to have to step up because monetary policy's not going to be the big influence in the positive sense it has been over the last 30 years."
Fiscal policy is led by the Government, while monetary policy is the domain of the Reserve Bank.
"Monetary policy has been the leader of the pack for the last 30 years," said Bagrie. "Fiscal policy, Government policy, is going to need to be the leader of the pack for the next 30."
