As we bit farewell to February, let’s talk about the month where interest rate expectations changed.
While we’d all love for property prices to stay stable and even start increasing. When you’re in my business, it’s much better when people feel wealthy!
It’s time to face the cold, hard truth: the NZ property market might be overvalued by 20-40%. 
Now, before you start panicking and searching for a property market crystal ball, let me share an example to illustrate the current situation. In the process, perhaps you’ll see my point or you’ll conclude I’m crazy. Fair enough.
To borrow 80% for a $1 million property, you’d be looking at a weekly repayment of about $1,200. Add rates, insurance, and maintenance, and you’re up to a whopping $1,400 per week. This is the cost of ownership.
Meanwhile, you could rent a property like this for a mere $650 per week. That’s quite the difference, right?
Enter the OTR – the hero we didn’t know we needed. With an OTR of 2.15 for the above example*, it’s clear that owning a property in this market is more than twice as expensive as renting it.
So, what does this mean for the future?
Well, a rate rise or even rates staying high from here is not exactly a recipe for house price stability, and this is hard for me to say.
A neutral OTR of 1.5 or less would require:
1 – a mortgage rate of 3.5% or ,
2 – a property value decrease of about 20%.
Which one is more likely to occur?
I know which want I want to see happen, but that’s not what we have to consider.

Check out the following video for a good explainer from a US context: https://youtu.be/R3TH8RIGsvU?si=oxvqhwl3qmDQEj8k

* The Own To Rent ratio (OTR) is a measure of how much it costs to own a property versus rent it.
 
A higher OTR means there’s negative price pressure being applied to property.
 
As above for example: the annual cost of owning is $1,400 x 52 = $72,800
The annual rent for a similar property is $650 x 52 = $33,800
The OTR is $72,800 / $33,800 = 2.15
 
This $1m property is more than twice as expensive as renting it. This property is an Auckland property I own, but actual OTR ratios will vary depending on the region.