Auckland has come back to life after two years of lacklustre house sales and easing house prices. At the same time, the rest of New Zealand is taking a bit of a pause after a strong run of price appreciation.

Our view is that property prices will normalise somewhat in 2020. The period of high price growth across the rest of New Zealand was fundamentally driven by low interest rates and there’s still some room to move, but it is mostly priced in now.

With this context in mind, let’s dive a little deeper. Here are some of our top-level property predictions for 2020.

Yields

Investors appear content with a gross yield of around 4% in the cities where they get long-term capital appreciation from population growth. Outside of growing cities, we’d put another 1.5% yield on top of that, and say five to 5.5% is a decent yield.

Low Interest Rates

It’s clear that low interest rates are here to stay and that will cause a different set of problems – reducing retiree income and also making rental accommodation a much bigger challenge for those retirees who cannot access savings.

And then there’s homelessness, which won’t go away with low interest rates. It will probably get even worse given our inability to build affordable housing fast enough, and ineffective government policy.

‘The period of high price growth across the rest of New Zealand was fundamentally driven by low interest rates and there’s still some room to move, but it is mostly priced in now’

Official Cash Rate (OCR)

The OCR could go lower next year. After all, there are now USD$15 trillion of negative interest rate bonds circulating the world and nobody thought that was possible a decade ago.

Home Loan Rates

Even with a lower OCR, home loan rates won’t necessarily decrease because the Reserve Bank is increasing bank capital – that will create a big cost for banks. Keeping in mind banks are already incurring big costs across other regulations and also facing tighter margins.

The only thing that could drive mortgage rates lower is competition, but if they are all facing headwinds it’s hard to see where that will come from. The exception might be Kiwibank, as it has a shareholder in the NZ Super Fund that takes a long-term perspective and is growth orientated.

Property Still A Solid Investment

For savers, there’s no good news. Lower rates are here to stay and that will continue to encourage people to hunt for returns elsewhere, including in property. We will continue to see lots of innovative financial products coming to market like crowd-funded commercial property where the investor yields are attractive.

2020 At A Glance

• Low interest rates are here to stay.
• The OCR may decrease even further. Home loan rates should remain fairly stable.
• Expect more innovative financial products to emerge. There’s no crystal ball to consult here, so it’ll be interesting to see just how low rates go in this cycle. Most people will miss the bottom before the long-term rates start climbing back up (hindsight is always 20/20) but as mentioned, we don’t see them going up by much.