From One Extreme To The Other

15 Dec 2021

From One Extreme To The Other

This will be our last communication for 2021, as we sit back and reflect on the year that has been.  There have been some notable highs and lows.  But that’s what we expect in financial markets.  Change is normal.  Property and share owners have done well from more flexible credit and low interest rates with lots of money slushing around.  Bond holders on the other hand have not, as interest rates have started to rise, and rise sharply, particularly in New Zealand.  This has been reflected in the value of bond portfolios.

As we see rates rise, we may see less money in circulation as central banks try to curb inflation.  This will also mean people spend less and it will impact on businesses.  So, we may see revenues drop which may flow through to share prices.  Interest rate rises will also flow through to affordability and what people are prepared to pay for property.  Bonds, once interest rate rises are fully priced in, may become the flavour of the month again.  You start to see why diversification across asset classes (property, shares, bonds), industries, countries becomes important.  Whatever the flavour of the month is, you will be enjoying a taste.

From all of us we wish you a very restful and enjoyable Christmas and New Year’s break.  We will be taking time off.  Please check our social media pages for hours of operation.  Some phones will be going missing, just to remove the temptation!!

This month from Tony Alexander

Back in May 2020 the Reserve Bank stripped away all loan to value LVR requirements just after they had taken interest rates to their lowest levels on record. The impact in the housing market was immediate.

Despite deep worries about the economy and employment, people went on a house buying spree perhaps best seen in two sets of numbers. The first is the monthly growth in housing debt. In the six months leading into April 2020 housing debt on average rose by $1.6bn a month.

That average continued over May – July, then since August last year growth has averaged $2.7bn a month. The peak was March this year with a housing debt gain of $3.7bn.  The October rise was $2.5bn.

The other set of numbers is the monthly change in average NZ house prices measured using the REINZ’s House Price Index. On average house prices rose by 1.1% a month in the six months before April 2020. They then rose just 0.4% a month from May to July but since August last year have gone up on average 2.2% a month.

Loose monetary conditions engineered by the Reserve Bank swamped initial concerns about the economy and subsequently caused house prices to soar. But now we are in a different situation.

Fixed mortgage rates are back around levels of early-2019. House prices rose on average 0.1% a month from mid-2018 to mid-2019. But more importantly credit rules are much tighter than back then. Heading into mid-2019 banks could have 20% of new lending to owner occupiers with less than a 20% deposit. Now that limit is 10% of new lending.

Investors back then needed a 30% deposit from the start of 2019, 35% before, whereas now they need a 40% deposit.

Banks are now applying debt to income (DTI) ratios, and this is disqualifying some borrowers from getting as much finance as they require. And finally, the requirements of the Credit Contracts and Consumer Finance Act have been radically strengthened to the point where banks are more gun shy of lending to householders than at perhaps any time since the GFC if not decades before then.

With these new hefty restrictions in place and considering that house prices have risen over 40% since March 2020, it is not hard to see why some of us economists are can conceive of slight declines in average house prices next year.

For additional information on the economy, housing market, and interest rates, you can subscribe to Tony’s free weekly Tony’s View publication at

Disclaimer:  This newsletter is meant to be informative and engaging, hopefully not a cure for insomnia.  Please don’t take this as personalised financial advice.  Discuss your situation with an Advisor.  This is where I need to say past returns are no guarantee of future returns.


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