This month Tony Alexander looks at what is likely to happen to house prices post Lockdown and we look to answer a question that is often put our way.  But first here’s what Tony has to say:

Last month I wrote about the shift away from record low mortgage rates the Reserve Bank needs to engineer in order to slow the pace of growth in our economy and get inflation back below 3%. Is the outlook any different now that the economy has once again been struck by a nationwide lockdown?

Not really. The Reserve Bank decided a day after we went into lockdown to delay their planned rate rise on August 18  in the interests of seeing how things would pan out. What we have seen is a housing market continuing to rise firmly with people strongly aware of what happened the last time we came out of lockdown – prices soared.

Prices are not going to rise by another 31% in the coming year. But the entire media discussion about housing during lockdown has revolved around listings shortages, prices hitting records, young buyers being frustrated, soaring construction costs, and the pace of construction being slowed by materials shortages – on top of the direct lockdown effect.

The chances are high that the lockdown will add some upward impetus to house prices. But that is just likely to make the Reserve Bank more determined to raise interest rates. This is especially so given data we have recently received showing strong jobs growth in June (1%) and July (0.8%), and hikes in shipping and materials prices.

Also, the monthly survey of real estate agents I run with REINZ shows that since lockdown started, FOMO (fear of missing out) has increased, there are more first home buyers in the market than anytime since March, and fewer investors are selling. Another survey I run of people’s spending plans has recorded a rise in intentions to buy a house to live in since lockdown started.

Interest rate rises remain on the cards, with the first step up likely to come at the Reserve Bank’s next rate review on October 6.

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

Should you pay down the mortgage or invest?

Firstly, we need to advise that it is difficult to guarantee you a return above that of current mortgage rates.  However, if you invest over the long term, it makes sense if you can earn an after tax return greater than your mortgage.  As you can see from the illustration below, shares have delivered a long term return above 10%.  (Graph supplied by Consilium)

Also, planning for your retirement may include paying down your mortgage by the time you retire and allow you to build enough capital to drawdown on in retirement.  That is, you can use up the capital you have built up over your working life to live off over a set period of time.  With compound interest the sooner you start the easier it may be!

Of course, there are other things that we need to factor in.  Namely, your tolerance to risk and your current situation.  Paying down your mortgage is a guaranteed return (You are saving your mortgage rate before tax).  Investing in shares comes with volatility.  We need to ensure that doing this isn’t going to keep you awake at night.

There are other factors to consider as well.  Such as wealth concentration.  You may have heard of diversification when it comes to investing.  Wealth concentration is the opposite.  If you have all of your money (wealth) tied up in your property, this comes with its own risks.  You are susceptible to property market movements, natural disasters such as earthquakes, flooding etc.  Investing in a broadly diversified portfolio of shares and other assets means your wealth is being invested into different assets with different exposures to risk.  Meaning if something happens to one you still have wealth stored elsewhere.

As always, best to chat to an Adviser to discuss your situation.

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.