Low Interest Rates, House Prices and Public Finance



Popular wisdom has it that low interest rates create or exacerbate house-price bubbles. Yet recent reductions in interest rates in New Zealand appear to have, if anything, slowed the housing market, at least in Auckland. Further, countries with negative interest rates – Switzerland, Denmark, Sweden and now Japan – are not countries renown this decade for housing bubbles. The 2004-08 housing bubble in New Zealand took place in an environment with rising and high interest rates.

People on the political left should be challenging these popular wisdoms. And should have empathy (but not sympathy!) for financial speculators. We deal with these behaviours best by putting ourselves in the heads of the perpetrators.

Let’s consider a situation reflective of Auckland in recent years. An ‘investor’ buys a house for $800,000 with the expectation of selling two years later for $1 million. If ‘he’ (statistically more probable than ‘she’) pays cash, and allows house-sitters to stay there rent-free, his expected financial return will be $200,000 (25% of the outlay).

If he borrows 80% on his real estate purchases ($3.2m loan) he could buy 5 houses with his $800,000 cash. (He would now be a ‘leveraged’ investor, borrowing $3,200,000.) If his loan is interest-only, his interest costs will be $256,000 (4% mortgage interest rate), $320,000 (5% interest rate), or $384,000 (6% interest rate). His two-year investment return on outlay is 93%, 85%, or 77% (depending on the interest rate). These are very high returns (even without letting the properties), and higher returns with lower interest rates. This is the conventional story.

But what if higher interest rates lead to higher capital gains? This is not the conventional view, but it does make sense. When interest rates are high, banks lend less to businesses and more to speculators with securable assets. So, if higher interest rates increase the proportion of lending that goes into real estate (as well as attracting bank deposits and the like from foreigners), then expected capital gain will rise as interest rates rise. Increased capital gains with increased interest rates is what we saw in New Zealand in 2004-08.

I redo the above figures, but allowing for 20% expected capital gain if the mortgage interest rate is 4% and 30% capital gain if the interest rate is 6%. The two-year rates of return on outlay would now be 68% (with 4% mortgage interest rate), 85% (5% mortgage interest rate), and 102% (6% mortgage interest rate). The higher the interest rate, the higher the return.

While a capital gains tax would only make a small dent in such speculative profits, lower interest rates in 2015 may be making bigger dents. Already New Zealand banks are lending more to a diverse range of businesses which employ people, and relatively less to speculators. Interest rates could fall more, despite the lack of appetite for lower rates from the Reserve Bank Governor.

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Negative interest rates – as in Europe and Japan – stabilise the debt accumulation process that gave us, for example, the 2008 global financial crisis. And, where they exist, negative rates do not appear to have created the rampant expectations of capital gain (as discussed above) which destabilise world systems much more quickly than greenhouse gases do.

With very low interest rates, governments can borrow with minimal debt-service cost, improving public services as well as modernising physical infrastructure. Even The Economist thinks (Building Works, 29 August 2015) governments should be taking more advantage of “rock-bottom interest rates”.


  1. I would think that low (or negative) interest rates would discourage the public from lending to banks; and while some mortgage lending may be monies created “from nothing”, not all would be, so low interest rates probably would dampen mortgage lending.

  2. The current property bubble has nothing to do with interest rates. It is led by 60,000 migrants and unfettered investment by offshore investors who eye up NZ as a bargain.

    As well as getting a free NZ passport and ability to work to Australia in the future by coming here (you don’t really even need major skills being able to cook or project manage are essential skills on the migrant list) – presumably NZ business are so used to corporate welfare in NZ – they don’t really think they should have to train local people – especially when there is a captive market of immigrants who will work for slave wages for 3 years to get citizenship).

    As well as that, certain countries rely on bribes as an unofficial currency – what better way to launder money and hold it safe than little ol NZ.

    The bonus is that because there are so many migrants able to come here then their housing investment just keeps going up with the demand.

    Most of the migrant investors I know, do not pay any taxes on rents, declare anything or file any tax returns apart from companies. Apparently you don’t rent them at all (in China you buy property but most people don’t rent it, they just leave it empty as an investment). The idea that they will suddenly pay up a capital gains tax when they leave is laughable.

    Capital gains tax will effect the local Kiwi’s selling. i.e. they sell their house, and then they have 15% less or whatever to buy back with. Migrants coming in, will benefit from it as less local buyers (each time locals sell they lose money). But the reality very few will people will pay it, there are so many ways to avoid capital gains taxes – apparently the richest people in NZ (worth million) don’t even make the top tax rate. To think that they will instruct their teams of international accountants to suddenly pay up capital gains is again laughable.

    That is why the Labour idea of capital gains was disliked so much. Pretty much the only ones effected would be a teacher with a 2nd home for retirement or the family bach. Apparently trusts were exempt!! Just tax the honest more to prop up the migrant investors seemed to be the Labour way. They might have been trying to solve a problem but beating up the middle classes on property and retirement is not the right way to do it.

    If you want to tax property then a stamp duty on change of ownership is the fairest and hardest way for tax avoidance.

    I’m not necessarily advocating that as a left wing policy as land rights are sacred to Kiwis especially Maori so not sure it will be a winner!

    Tightening up migrant criteria will have the quickest effect on the property bubble and making it a condition you have to be resident for 6 years before buying might be more effective.

    • Sorry you lost me at property bubble has nothing to do with interest rates? That may be true if mortgages have nothing to do with buying a house

      • Hello Sam, if you are an overseas investor you do not necessarily worry about Kiwi interests rates as you can borrow at lower rates in your own country.

        Also richer people might not even need to borrow money to fund their purchase, they can buy it outright. This is especially applicable if you are money laundering.

        • There is the commission and spread situation, when they are low, all that means is brokers try to turn your account over aggressively so you pay them more. Brokers tell you to do things that only make them money, all the time.

          I think it is really really really important to find brokers that aren’t taking the other side of your trades. That’s a huge conflict of interest that is industry wide.

          Firstly when the U.S created the FED. I think Keynes was right to lobby for a bank whore which is a bank note that forces countries to spend there surplus on countries with a trade deficit (if the euro had one the Greek crises would not have happened). Alan Greenspans models are wrong, and Wheelers economic data is inadequate, and that NZ responds to financial crises with inadequate data.

          Now that Bitecoin has been the best performing currency two years running. I will continue to celebrate that and the transparency it is forcing on the financial sector which is in huge decline because of the emergence of Bitcoin.

    • Negative interest rates should be understood as a market-clearing price in a world of high saving and low demand for borrowed funds.

      They should not be thought of as a policy, and certainly not as a conspiracy. There is however an ‘entitlement culture’ whereby certain people believe that the receipt of interest payments represents some kind of human right. Whenever we receive interest, we must remember that someone else is paying.

      • Correct me if I am wrong, but hasn’t the BOJ and successive Japanese Governments been trying to get a pretty huge chunk of the population to start spending and consuming, but said chunk of the population hoards their cash and downright refuses to do anything with it but gather more cash?

        Hence the constant attempts at QE to throw enough money into the place to keep it running … but its really fighting against this massive inertia of ‘Save Save Save!’ because a lot of the locals (especially older locals) think that you HAVE to do this

        You know somethings wrong when you are effectively trying to make old people spend.

        • Japanese monetary policy simply reflects underlying market conditions. The Japanese (and many others) simply prefer to lend to their government than to be taxed by their government. They want the government to spend their unspent income; somebody has to.

          From an orthodox economics point of view, however, the only rational purpose of saving while you are young is to spend more while you are old.

          • From my POV this is just fraudsters trying to get savers to buy into an over cooked market so they so the big players can exit with every ones cash.

            Money is leaving Japan in the billions. Every ones trading in yen for dollars

              • You know what else they’ve done eh, UBI referendum 2016 😀

                I like the Swiss, home of the fondue and federal back door economics.

                I have to admit. They just get things right

        • Japanese monetary policy simply reflects underlying market conditions. The Japanese (and many others) simply prefer to lend to their government than to be taxed by their government. They want the government to spend their saved income; somebody has to.

          From an orthodox economics point of view, however, the only rational purpose of saving while you are young is to spend more while you are old.

  3. The face of money is changing rapidly and moving eastward and banking practices are being cleaned up. We have seen enormous numbers of high-level bankers and government Heads/officials simply disappear from view.
    The Cabal-controlled illusion of bubbles, bursts, good times and bad times is coming to an end and I choose just one viewpoint to post:

    The latest false-flag is, of course, the petri-dish Zika virus which the Cabal has unleashed on humanity to create diversion away from, as one example, the signing of the TPPA. http://www.globalresearch.ca/who-owns-the-zika-virus/5505323
    Another example is the power balance in the Middle East is also changing as the Khazarian Zionist stranglehold continues to lose its grip.

    Carbon dioxide – a basic building block of LIFE – is not the worry but the tonnes and tonnes of sulfur dioxide which has been sprayed at high altitude around the world for many years – including little old New Zealand. (John Key and previous governments does/did nothing? Of course, there’s no profit for Big Pharma in a healthy nation.)

    Well, Keith, I’m not qualified in anything except to say we are tired of manipulated “economics” which demands the production by many for the consumption of the few. We are tired of carrying out Cabal-set tasks to pay Cabal-owed debts.

    The changes to a decent and prosperous way of life for all, a new fairer system of governance and banking is coming, and even our government will be obliged to bow its head.

    • Yes, the criminals who run the western world do carry out false fag attacks (9/11 being the most obvious: concrete and steel buildings do not fall to the ground at free-fall and in their own footprint as a consequence of short-lived low-temperature fires) but to say that carbon dioxide at 403ppm, 125ppm above any previous natural peak


      and rising at over 3ppm per annum, faster than any time in the Earth’s history


      ‘is not the worry’ is just plain silly.

      We are witnessing accelerating planetary meltdown right now.


      And when the last of the ice melts (maybe as soon as later this year, we’ll know for sure in 7 months) planetary overheating will enter a new, horrifyingly fast, phase.

      ‘but the tonnes and tonnes of sulfur dioxide which has been sprayed at high altitude around the world for many years – including little old New Zealand’

      The aerosols generated from the millions of tonnes of SO2 emitted over decades actually masked (Global Dimming) the true rate of warming due to CO2.

      Once global industrial activity goes into decline -which it must inevitably do in the near futures because of Peak Oil and Abrupt Climate Change- the ‘protective’ aerosols and particulate matter in the atmosphere willdrop out and heating will suddenly jump to a higher level.


      All that said, we know governments around the world will do nothing whatsoever to prevent accelerating planetary meltdown: in fact they will continue to pursue policies that exacerbate the predicament in the name of ‘economic growth’, and in doing so ensure that the Sixth Great Extinction Event is guaranteed.

      The short-term interests of corporations now rate higher in government priorities than the future of humanity and the millions of other species about to be wiped out via industrialism, as demonstrated by the signing of the TPPA.

  4. Interest rates have been suppressed to keep the capitalist loot-and -pollute Ponzi scheme going just a little longer at the expense of everyone except those close to the free money-spigot.

    Most of the ‘statements’ made in this item are absurd. And this one is particularly absurd:

    ‘With very low interest rates, governments can borrow with minimal debt-service cost, improving public services as well as modernising physical infrastructure. Even The Economist thinks (Building Works, 29 August 2015) governments should be taking more advantage of “rock-bottom interest rates”.

    Yeah right! Get communities into greater debt to build stuff that will have no utility quite soon.

    So-called development is the problem, not the answer. So-called development and infrastructure (to support the present way of life) are a major component of what is causing planetary meltdown.


    Buy as little as possible; build as little as possible; travel as little as possible.

    Actually, it’s probably already too late to prevent runaway greenhouse rendering the Earth largely or completely uninhabitable, but the kind of nonsense spouted by people like Keith Rankin and ‘The Economist’ still irks. The way this is panning out -rapidly accelerating environmental meltdown- humanity probably has less than 20 years. Maybe only 15.

    Just like the Easter Islanders who buggered their life-support systems and paid a horrendous price, the capitalist loot-and-pollute culture will leave plenty of monuments to stupidity. But here won’t be anyone to see them.

  5. The interest rate cycle is only a small causative factor wrt housing inflation. If interest rates were the sole cause of housing inflation -then in single monetary zone like the euro-zone and the US you wouldn’t have such divergent responses to the same prevailing interest rates. San Francisco prices booming -Houston not at all. Germany never had a property boom, Spain and Ireland did.

    P.S Sweden has had several property booms in the last few decades. Their Reserve Bank agonised over whether to increase interest rates to suppress inflating house prices and ensure financial stability or decrease interest rates to combat deflation. They chose to combat deflation -haven’t heard what has happened to house prices since. Probably not much change in whatever pattern they had because it is other factors that have more effect on house prices.

    Read “Generation Rent” by the Eaqubs for a comprehensive description of NZ’s housing crisis and possible solutions.

  6. NIRP is usually employed as an utterly desperate measure to lower the value of the currency. The yen instantly lost 2% of it’s value (from a just -0.1% rate) since banks shipped their money offshore rather than lose money by parking it at BOJ. Naturally, it also produced a massive one day rally in global stock markets as Japanese capital fled to any investment that still shows a positive yield (e.g. shares, bonds). I fail to see how any of this “stimulated” anything in Japan, although a lower currency can be positive for exporters (it’s not great for importers of course since it is obviously inflationary).

  7. The housing market in Auckland has slowed a bit due to the new regulations the government brought in, that is stricter lending requirements for banks, not due to any changes in the interest rate.

    And it is not just economic purity thinking that determines how markets function. The theory and practice are not necessarily one and the same. Economics is know to be determined by at least 50 percent human behaviour, that is psychology.

    That depends also on cultural behaviour, and when you mention a market like Germany, you have a market for housing that has predominantly been a rental one, because it has been the common practice there so long, that you rather rent than buy an expensive home for yourself.

    Germany is a working person’s society, although now more gentrified, but most people have to save a heck of a long time to get enough money for a deposit on a home or apartment they want to buy. There is a history also of people being somewhat happy with renting, it is socially acceptable, because there is a history of such housing behaviour. Then there have been significant housing estates, some private, other collectively owned or state funded housing, that people can afford to live in. Apart from some flash cities there it is not so expensive to rent, it is cheaper in most places than to rent in Auckland.

    When you have this, interest rates may not be so relevant, also because people there, same like the Chinese and some other cultures, are hesitant to borrow too much. That is cultural, and it still influences the economic behaviour and performance of other countries.

    It is the same like looking at the alcohol market in countries like Saudi Arabia, there wont be much or any of such a market, because it is forbidden.

    So go back and compare apples with apples, not with pears.

    New Zealanders have for generations sadly been encouraged to borrow and spend, and so the banks can exploit the desire for products and housing many have, to afford this on debt.

    That is why we have amongst the highest interest rates in the world, in comparison. We need to look at our culture, and also at the way we do and finance things.

    Abandoning state housing is the wrong way, which this government suggest, as the market has failed abysmally in Auckland. Most are shut out of it, and only new and returning migrants with access to money can play on the market, hence the high prices.

    Global conditions in a distorted market and a more pronounced class system are the reality. This is not so much dependent on interest rates.

  8. I agree that the government as a major economic player can always do a lot with access to cheaper interest, e.g. build infrastructure and state social housing.

    As for speculators, I have observed how homes in and around my suburb in Auckland have changed hands over and over again over recent years, where someone bought a property, perhaps briefly got tenants in, or moved in themselves, and then flicked the same property off again for a nice capital gain, with or without renovations and a bit of paint put on.

    Sometimes it seems they can hardly wait for the new paint to dry, before they put a home up for sale again on websites or the usual estate agent’s ones.

    That is what is a very destructive, harmful element in our population, but this shit government does little to stop all this speculative madness.

  9. ‘We have lived at the best time, with modern medicine and transport, able to enjoy New Zealand before it loses the flavour we love … to form balanced judgements about our future environment we must cease being technologists and economists and become philosophers, not afraid to look at the total picture.’
    – Sir Charles Fleming. 1916-1987.

    Just thought it was apt.

  10. Perhaps there is little correlation between interest rates and speculation. As long as you can make a capital gain and the “animal spirits” are rampant, a few percent here or there makes no difference whatsoever. Prices are also set at the margin so immigration is clearly one of the tools to maintain demand for housing in particular and keep the fear of missing out and greed percolating. Raising interest rates is only one, indirect way to restrict the demand for credit. Once the psychology changes, the expectation of easy gain is dampened, demand for big mortgages will vanish no matter how low the interest rate

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