What If NZ Interest Rates Go UP From Here?

Added: 2026-05-26

[00:00:00]A lot of people are still thinking that interest rates are going to go down.

[00:00:04]You hear it in often in conversations like, "Just hold on another 6 months or once the rate cuts come through." Um the problem is the data's not really saying that anymore.

[00:00:16]Inflation's coming in a lot hotter than expected.

[00:00:19]Oil's gone back up.

[00:00:22]There are wars all over the place.

[00:00:24]Governments are just drowning in debt.

[00:00:27]And now some economists are starting to speak openly about rate hikes again. Not cuts, hikes, right? Interest rates going back up.

[00:00:38]So, what happens if the rates we've got now are actually good rates?

[00:00:44]And that's what I want to talk about today.

[00:00:46]I'm John Kinneil. I've been a property investor since 1997. I've been a a developer of medium-density housing since 2004. I've built about a thousand units to date and I think there are still a lot of people living in the old world.

[00:01:02]The old world was interest rates kept on coming down over time.

[00:01:07]Money was cheap. It was easy to get leverage. There was asset inflation everywhere.

[00:01:13]And I'm beginning to think that that world might be over.

[00:01:17]Not completely, but I don't think people really fully appreciate how much things have changed in the last few years. So, let's have a look at where we actually are. Inflation for the March quarter came in at 3.1%.

[00:01:32]The Reserve Bank had forecast 2.9%. So, it came in above the Reserve Bank forecast, right? 0.2% above. Well, who cares?

[00:01:40]Well, actually the market cares. Because once inflation starts getting sticky, markets get nervous.

[00:01:48]And remember, the Reserve Bank's target range is 1 to 3%.

[00:01:52]Which actually raises another question.

[00:01:54]Why is the Reserve Bank's target range 1 to 3%? Why isn't their target zero inflation? I mean, I don't want the cost of everything to go up every year. Do you?

[00:02:06]I mean, the Reserve Bank's job at the moment is basically to ensure that your money buys less every year.

[00:02:13]How is that a good thing?

[00:02:15]But that's probably a separate podcast.

[00:02:18]So anyway, the Reserve Bank's now forecasting inflation for the June quarter at 4.2%.

[00:02:24]Remember March was 2.9. That came in at 3.1. Now they're forecasting like a whole point higher.

[00:02:32]At the same time, oil prices are rising.

[00:02:35]Shipping costs are up. Insurance and council costs are up. Everything feels more expensive because it is.

[00:02:42]And I think there's a decent chance that things get more expensive from here.

[00:02:47]The New Zealand dollar has just dropped back into the 50s against the US again, right? So which is great for exporters.

[00:02:53]If you're exporting kiwi fruit or beef, you're probably having a great year. But if you're like most normal people who have to buy imported stuff like TVs and clothes and iPhones and things, then everything's getting more expensive because we're paying for it in a weaker New Zealand dollar.

[00:03:12]Then you've got all the geopolitical stuff, right? The war in Ukraine, conflict in the Middle East, supply chain disruptions. You know, people forget inflation doesn't just magically disappear because the central bank wants it to. A lot of inflation is coming from disruption and energy costs. This energy is so important, right? Energy runs the world. And I think this is massively underestimated, the the importance of it. I mean, prosperity is basically energy converted into goods and services.

[00:03:43]If you haven't got energy, you haven't got transport, you haven't got steel, or shipping, or concrete, fertilizer. You know, some of the food production. I mean, nothing works without it. Oil is still how the world moves everything, runs our transport system, but it's not just fuel. Oil gets turned into all kinds of chemicals, from plastics to resins to pharmaceuticals.

[00:04:08]It goes into almost everything.

[00:04:10]So, when energy costs rise, eventually that cost leaks into the entire economy.

[00:04:17]And then, there's another thing.

[00:04:19]A lot of borrowers are still mentally pricing in cuts.

[00:04:23]They bought property assuming that rates will fall. They've stretched themselves assuming those rates will come down. And they've been thinking, well, things are tough now, but once rates come down, we'll be sweet. But what if they don't come down? What if they only come down a tiny bit? Or what if they go up?

[00:04:40]I mean, it changes everything, right? If you if you've got a $800,000 mortgage and interest rates go from 5% to 7%, you're going to need to find another $1,500 a month, right? After tax. That's serious money. I mean, that's money you're not spending on groceries or school fees or a holiday. Um that's the difference between sleeping well at night and and not, right? And I know a little bit about that from my when I was doing a lot of property development. Um but I still don't think people are fully adjusted psychologically to the idea that money might simply cost more now, right? I mean, interest rates are the price of money. When everything feels stable and people are making money, money's cheap, right? You want to borrow money? Yeah, here you go, because everyone's making it, everyone's paying it back, everything's great.

[00:05:33]But when the world feels risky and uncertain and there's inflation and wars and geopolitical uncertainty, then the cost of money goes up.

[00:05:45]And, you know, cheap money in the last 15 years covered up a lot of bad decisions, right? It was pretty easy to look smart when you you know, in the last 15 years. Um you borrowed too much, just borrow some more.

[00:06:01]You know, there were people running on really skinny margins, but it didn't matter because prices kept going up. I think now we are entering a very different environment, and this isn't just New Zealand, either. And I often hear people saying, you know, um Australia is cheaper than New Zealand.

[00:06:17]Ha. Maybe house prices used to be cheaper in Queensland 10 years ago. Um I don't even know if that's true anymore, but you know, we were just there for a couple of weeks, and I found Australia to be very expensive. Hotels are more expensive, restaurants are more expensive, general living costs were a lot more. And okay, we're in Sydney, but still, Australia is not a cheap place to live.

[00:06:40]And now they've got growing political pressure around taxes over there. You know, they're talking about increasing capital gains tax. They want to limit negative gearing, uh changes to the uh trust structures, how they're taxed, um wealth taxes potentially. And yeah, people can argue about whether politically that's good or bad, but economically it matters because every time governments make ownership harder, behavior changes.

[00:07:09]People invest less. They build less.

[00:07:12]They They take less risk, right? Some people are just going to say, "Well, bugger it. Why bother investing if the government's going to take half of it?

[00:07:19]Let's Let's just spend it." Or not even take the risk in the first place, right?

[00:07:25]Don't start a business. So, a lot of it I think comes back to Western governments borrowing like crazy over COVID, right? Um I mean, New Zealand government debt is is about double what it was in 2019.

[00:07:40]And now you've got higher interest rates on that debt. So, the servicing costs have exploded.

[00:07:47]So, that means the governments everywhere are trying to tax more, right? They're going after property.

[00:07:52]They're going after investors, land, capital, wealth taxes. They're just looking to get money wherever they can.

[00:07:58]And again, you can agree or disagree politically, but I don't know. Um I picked up a book I'd read again recently, um The Creature from Jekyll Island. It's about the uh setting up of the Federal Reserve in the States. And whether you believe it or not, but it really makes you think about how the money system works and how, you know, debt expansion and what happens when assets increase faster than wages.

[00:08:25]And I think people are really feeling that now, right? Everything's feeling more expensive. It's harder to buy a house. It's harder to buy a business.

[00:08:32]It's harder to invest in assets.

[00:08:34]The basics in life are more expensive.

[00:08:36]And And it's been going like that for a few years. And I think young people feel it the most. I mean, my daughter's at at university at the moment and she had to go to a the doctor and she's out of town, so she can't go to the family doctor. She had to go to one of those places where you have to wait a couple hours to see someone. And they charged her $130.

[00:08:57]You know, this is a a university student working part-time on minimum wage. 130 bucks, that's real money. So, I understand why young people are pissed off. I really do, but I don't think the solution is more bureaucracy and more taxes and more government spending because there's just more complexity piled into the system, right? Governments are massively expensive. And I think a lot of people underestimate how inefficient large bureaucracies are. You know, some people say, "Well, I will you know, doctors should be free." Well, uh just hang on a sec, right? Let's look at that $130.

[00:09:36]If that was to be funded by the taxpayer, I I I I think you'd have to take two or three hundred dollars off the taxpayer in order to get a hundred and thirty to that medical clinic, right? Because uh someone's got to collect the taxes and then it goes into a big system and you know, there's all kinds of people working on it and managers and staff and holidays and meetings and you know, they just burn the money up. Nothing's free, right?

[00:10:04]And despite all of this, I think there are still opportunities. There are still opportunities even in this market because fear creates opportunity. You know, when everyone's confident, deals are harder to to find, you know, you've got to pay up.

[00:10:22]But at times like now when people are nervous, maybe they're over-leveraged, some people have to sell, some people are just sitting on the sidelines.

[00:10:32]I think, you know, if you're disciplined, you can still do well. Tony Alexander's latest report said that 38% of mom and dad investors are looking to sell at the moment. Only about 12% looking to buy.

[00:10:43]That is a massive shift. CoreLogic data showed that, you know, more properties are reselling at a loss, especially apartments.

[00:10:51]And, you know, which is not good, but markets need a clean out sometimes, right? Bad deals need to get cleaned out. Speculators need to be washed out.

[00:10:59]The people who usually get hurt in these markets are are people who are waiting for the market to rescue them, right?

[00:11:05]They were they were taking a gamble and some, you know, some people are going to get hurt who did nothing wrong at all, but >> [gasps] >> that's you know, it's just the way this works, unfortunately.

[00:11:17]So, what can you actually do now? I I think if you're going to if you're going to do something, you've got to keep it keep it really simple, right? Stress test deals harder.

[00:11:28]If the deal only works at low rates, then it doesn't work, you know?

[00:11:32]And your margin at entry matters more than trying to predict anything else, interest rates and so on. Nobody knows where things are going, you know? So, not me, not banks, not economists.

[00:11:44]The Reserve Bank's forecasting hasn't exactly been perfect.

[00:11:48]But, you know what your margin is on the way into the deal.

[00:11:52]And as a as a property developer, I've I've never gone to below 20%, right?

[00:11:56]That was my I wanted 20% return on cost, and that was my target, and if I couldn't get it, then I I wouldn't go into the deal. Sometimes I was lucky and I could get 25% or 30%. That's awesome, but uh you know, but your entry matters cuz there's a a saying that I believe 100% and it's that you make your money when you buy.

[00:12:19]And and what that means is is when you buy, that's the only time you're actually really in control. Is you know, you know how much you're paying for something, for an asset or for a business.

[00:12:30]You know, after that, after you've bought it, who knows? I mean, you can do all the calculations that you want. You could buy gold going, "Okay, gold's safe. What could happen to gold?" And it could drop 20% tomorrow.

[00:12:42]Or you could buy Bitcoin thinking it's super risky and it could double.

[00:12:46]Nobody knows, but you can control what you pay.

[00:12:51]So, just make sure that you've got enough margin on the way in and you've got a buffer because no one knows where things are going next, interest rates, or what's happening with the wars or so on. But, you can control what you pay, you can control how much debt you've got, you can control your cash flow, what buffers you've got, and how much risk you're willing to take. And all of that really matters a lot.

[00:13:16]And I think the central sensible people now who are who are doing deals, you know, they would be building in a little bit of an interest rate rise, at least 1 or 2% you know, if you're going to be realistic.

[00:13:31]So, yeah.

[00:13:33]Look, I still I still think New Zealand is one of the best places in the world to live.

[00:13:38]And I think people can still build a good life here, but I think you need to realize that the game has changed. You know, you need to have more skills now.

[00:13:48]You need to have more financial education. You need more discipline.

[00:13:52]And you need to learn AI. I mean, seriously, everybody watching if you're not using AI every day, then start, right? Because the people who are going to be successful in the next 10 years are the people who know how to use AI best.

[00:14:08]If you're a builder, start using it on quotes today.

[00:14:11]Seriously, get Claude or ChatGPT, pay 20 bucks a month, and start dumping all your pricing in there. You know, if you're if you're pricing a job at the moment, you've been on site, put in the photos, put in the measurements, put in the materials, put in old quotes that you've done, GST details, you know, just load it all in and ask it to create a quote for you, and you will be amazed at how good it is straight off the bat.

[00:14:36]Imagine how good it'll be when you've been working with it for a year or 2 years or 5 years, right? And if you're still spending, you know, hours a day doing quotes, there'll be some builders are spending 5 or 10 minutes for your hour. So, you know, this stuff really matters. If you want to be competitive, you've got to get into AI because this is just the beginning, all right?

[00:15:00]So, thanks for watching. If you want to learn about property development, there are links below to the Property Development Club. If you want to borrow money on a development, then speak to the team at Squirrel.

[00:15:11]This is education only, not financial advice. Do your own research, all that jazz. I'm John Kenel. Have a great week.

[00:15:17]Thanks.