Cheap money, cheap houses

Friday, January 30th 2009, 9:09AM

The Reserve Bank’s 150 basis point cut to the official cash rate is indeed good news for the property market. Home loan rates are tumbling and all lenders, according to this table, pretty much have rates starting with a five. (Those who don’t are sure to have them soon).

While lenders have been criticised for not passing on the full 150 basis point cut straight away I suspect as competition mounts they will be forced to push rates even lower.

It is clear that the margins banks are making on their home loan business are the fattest they have been for some time, but you have to remember their volumes of business are way down on previous years.

The cuts we are seeing in the cost of money are going to make many people rethink their investment options. While bank term deposits and the like have been the vehicle of preference, it seems they will lose some of their sheen now. These rates are likely to tumble, just like home loans, and don’t be surprised to see rates with a three in front of them. These won’t give investors real after tax return.

If they want that they will have to look elsewhere. Two options which will be on the agenda are property and shares.

Shares may be hard for many to accept due to their volatility and also because there has been so much bad press around the market.

Property though, particularly residential, will start to look attractive again with cheap money and house prices down. Don’t be surprised to see the Kiwi love affair with bricks and mortar rekindled. The same affair Reserve Bank governor Alan Bollard tried to bust up last year by increasing and keeping the OCR high.

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