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Four ways low rates have boosted the market

Independent economist Tony Alexander says there are four ways that low interest rates can explain the "current and coming market strength".

Friday, October 09th 2020

Tony Alexander

In his latest market update, the leading economist outlines how record-low mortgages have helped the property market defy pre-Covid expectations. 

1. The economist says the Reserve Bank's decision to slash the official cash rate to 1% last year encouraged "a new flow of buyers into and reduced flow of sellers out of the residential property market". Low term deposits have also driven people into the housing market and away from traditional savings, he said. 

"The RB cuts cemented in the turning of Auckland’s cycle from its flat period to upward and added strength to the regions," he said. 

2. The Reserve Bank's emergency cut in March has "again [energised] buyers and discouraged people from selling and accepting lower returns from the likes of term deposits," Alexander added.

3. The economist believes that recent rate cuts have heightened the expectation "that interest rates will remain at low levels for many years". 

"Traditional fears of a bounce back in rates to previous cyclical highs have disappeared," he said. 

4. Anticipation of further rate cuts by the RBNZ is enticing more people to the housing market, Alexander added.

"The Reserve Bank has indicated that there is scope for their cash rate to be cut by perhaps another 0.75% next year – again driving more people into and fewer away from the property market."

Comments

On Monday, October 12th 2020 3:16 pm Viking60 said:

Many are assuming interest rates will remain low for an extended amount of time, foresight needs to be adopted, as inflation has numerous ways of surfacing. debt at this time is close to all-time highs in most if not all areas of the economy. Do low-interest rates really promote growth, the side effects I believe to some degree work in the opposite direction. It encourages malinvestment which creates risk in many areas, along with an unsustainable increase in the money supply. A prime example would be the years prior to the 2008 GFC borrowing costs were extremely low, such as they are now, the years prior to the GFC was in many ways the instigator of the collapse, this will and has in the past created a debt bubble which will eventually emerge creating mayhem once again. As we are all aware prosperity follows debt, but there is always the fear debt creates failure, thus providing an economy based on trust and false believes.

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