Why OCR hikes have put cash investors in prime position.

“The Reserve Bank hikes the Official Cash Rate.”

Over the last 6 months, it’s an announcement that Kiwis have been getting used to and for many (particularly homeowners) this constant rise in interest rates comes as a shock after a period of cheap borrowing. The recent increase of 75 basis points to 4.25% was a record jump and the Reserve Bank is forecasting the OCR will hit 5.5% sometime in 2023. (There is more to come).

How does this impact property investment?
The OCR is a tool that the Reserve Bank uses to manipulate wholesale interest rates that most property investors rely on. As a rule, commercial lending is based on 90 day bank bills plus a property specific investor margin. 90 Day bank bills are strongly correlated to the OCR rate. By manipulating the OCR, the Reserve Bank is trying to manipulate the cost and demand for money in the economy.

Asset prices are set to drop.
Increasing the OCR is designed to take money out of the economy by increasing the cost of investing. When this happens asset prices drop. We can see that happening right now in the residential property market and when there’s less investment, the economy contracts. The next announcement will be 22 February 2023.

Cash buyers have the advantage.
We believe the rise in interest rates will create considerable uncertainty in the commercial property marketplace. Traditional investors that see finance costs rising may be inclined to sit on the sidelines.

With less competition in the market, cash investors will have the opportunity to negotiate quality commercial property asset purchases at more favourable prices. While enjoying the
income from lease rentals and providing potential for long-term asset value appreciation as the wider economy resets and recovers in the future. We can sit outside of the finance world but have all the benefit as the market is inflated on the other side of the recession.