20 January, 2011
Buying or owning a house right now is a “pretty good idea” with inflation risk rising around the world, says New Zealand’s Tower Investments.
Chief executive Sam Stubbs told a media briefing on investment markets in times of rising inflation housing investment has proved a good decision for Kiwis.
His team believes mortgage rates will rise this year but not nearly as high as the Reserve Bank could lift the Official Cash Rate (OCR) because banks had large enough margins to absorb these rises and still lend on first mortgages. The OCR is currently at 3 per cent and the central bank is not forecast to lift it more than 65 basis points in the next 12 months.
Asked if suggesting buying a house as a hedge against inflation contradicted Reserve Bank and Government advice to Kiwis to quit their obsession with residential property and get saving, Stubbs said the central bank was trying to avoid another property market bubble burst.
“There’s no indication that will come along but equally, our argument goes that if you have the option of buying a house and you are worried about what will happen to the value of that house over the long term….we think that with rising interest rates and inflation…it will get ever more expensive for you to buy this thing if inflation comes along and we believe it will.”
Housing as an investment “doesn’t look like bad value right now”, he says.
Mortgage rates looked like being “reasonable” for the short to medium term because banks were keen to lend on mortgages, the lowest-risk form of lending.
“We’ve been through the global financial crisis now, if banks wanted to exit the mortgage markets in New Zealand they’ve had plenty of opportunity but they chose not to. They’ve chosen to withdrawn from commercial and industrial (lending), that’s why so many small and medium enterprises are hurting.”
The price of a house does not go down in inflationary times, it goes up, says Stubbs.
“Make no mistake, the great value destroyer of the 1970s and early 80s in New Zealand and globally was inflation. Those who had mortgages and houses protected themselves against a lot of that. Those who had a lot of fixed interest deposits in banks ended up suffering in terms of diminution of the real value of their investment portfolios.”
Tower is “quite bullish” on New Zealand’s economic prospects for the next year.