Property prices continuing to rise despite rising interest rates

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Property prices continuing to rise despite rising interest rates

A year ago, the housing market was booming, with the average house value in the country increasing 12 percent year over year to $827,000. The headlines shouted, “housing frenzy,” as first-time buyers and investors entered the market, lured in by ultra-low borrowing rates and fuelled by post-lockdown FOMO.

However, a year ahead and house prices have risen even further, with the average property value increasing by 27% to just over $1.05 million, despite repeated attempts to limit expansion. The Reserve Bank is once again threatening to tighten loan conditions in response to concerns over out-of-control inflation and unsustainable housing price increases.

Despite all the talk about price increases in recent years, and efforts by the Reserve Bank and both the National and Labour governments to contain them, they have soared from a 2.3% value increase in 2011 to a 27.8% this year.

FHB have witnessed Loan-to-value ratios (LVRs, which affect borrowing), Brightline tests (a tax on gains), high-density plans for Auckland, a building boom, a nationwide foreign buyer ban, an ambitious KiwiBuild scheme, and tax changes targeting property investors/speculators – and yet prices have stormed on, achieving spectacular heights.

OneRoof-Kantar Housing Survey 2021 examined how New Zealanders felt about property prices and 62% of people blame investors for the tripling of housing prices. However, economist Tony Alexander believes that prolonged periods of low interest rates have been a significant factor in rising prices, since they have enticed investors into debt-financed assets such as housing. This has probably been the defining feature of our property market for the last three decades.

With property investors relying on building capital growth to preserve wealth and guarantee their comfort in retirement, dropping house prices are unlikely to meet their expectations. Nonetheless, 42% of the 1,001 respondents believe the Government should drive property prices back to pre-Covid levels. This would entail rolling back the 39% increase in prices since March 2020.

According to former minister Nick Smith, “the Government made a terrible mistake last year by releasing $30 billion in extremely cheap money to the banks.” This money has mostly gone into the property sector, fuelling an additional 20% spike in house prices.”

In terms of buyer sentiment, ASB Senior Economist Mike Jones says, “Wildly stretched house prices combined with sharp hikes in mortgage rates are an unappealing combination for home purchasers.”

Jones continues:  “We estimate that New Zealand’s housing shortage has been decreased by around a third in the last year. And, if recent patterns continue, we may see the market revert to a more balanced condition by late next year. This progressive loosening of market conditions will contribute to a reduction in the upward pressure on house prices in the coming months.”

For professional mortgage & insurance advice, speak to our experienced advisers for a free consultation and no-obligation quote today. Contact the team at Professional Financial Solutions on 09 846 9934 or email on

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Ravi Mehta