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Economic Forces Bring Reality Check

We’re heading into part of a longer-term cycle defined by low growth, warns John Bolton.

By: John Bolton

31 January 2023

About a decade ago I wrote an article predicting that the housing market had peaked. I just couldn’t see how it could keep growing as it had, compared to underlying income growth.

We all know how that one panned out.

Our housing market’s stellar performance over the last 30 years has lulled a lot of Kiwis into a bit of a false sense of security that, as an investment, that’s just how property will always go. I’m thinking specifically of the widely-used rule of thumb that property doubles in value every seven years.

But there are some major economic forces at play right now that (even once we’re through the current period of higher rates) will make it dangerous for investors to rely on those same lucrative returns moving forward.


Short-term, the housing market outlook isn’t so bad. Right now we’re at the top of that same business cycle that rolls around like clockwork every 10 years or so, ushering in the next recession.

Higher interest rates are a natural part of that cycle and, along with low immigration and greater supply in market, that’s largely what’s driven the recent 20-30 per cent fall in house prices. The peak was higher than normal because of very low interest rates, so the downward adjustment will also be bigger as interest rates revert to normal.

But this should be a blip. Interest rates will stabilise and come down again, and once other factors start to unwind (immigration picks up, construction slows further, tax deductibility is reinstated) that could support a pretty strong recovery in house prices.

In fact the Treasury is predicting the market will be back to peak levels, in nominal terms, by 2026, so anyone buying now may actually stand to do pretty well short-term.

But there are other, longer-term economic cycles at play, which are set to push us into an extended period of low growth.


It’s not just property that’s skyrocketed in the last 30 years – it’s asset prices across the board.

A big part of that (as I’ve said before) has stemmed from falling interest rates, which have fueled demand by making it cheap for people to borrow and spend. But with the world now up to its eyeballs in debt, that’s not an infinite game, and demand will drop.

Rapid growth in asset prices has also created huge inequality between those who have reaped the returns and those who have missed out. And the added blowback, of course, has been inflation, which is always felt much more harshly at the bottom end of the market.

We’re seeing some of the earlier benefits of globalisation starting to diminish, and the security of domestic supply chains becoming more important.

And a lot of our economic growth has come at the expense of the environment, meaning we’re now having to take dramatic action to try and undo, or at least limit, the damage.

All of these factors have significant political implications, particularly in a democracy like ours.


As a result we should expect to see government taking a much more active role in the economy over the next few decades – a stark contrast to the last 30 years. The exact approach will differ depending on who’s in government, but higher levels of regulation will carry a hefty economic cost either way.

Between that and too much debt (and unless there’s some huge, as yet unidentified, innovation to give us another kick), the simple fact is we’re heading into part of a longer-term cycle defined by low growth.

Now, I love property, and I’m certainly not saying it’s a bad investment. It just simply won’t be as lucrative going forward, and yield will replace capital gains as the measure of performance.

So, the question to consider is if your portfolio value’s essentially going nowhere over the next 20 years (after inflation) is property the way to go to get the best returns? And with low growth across the board, if it’s not property, then what is it?

I wish I had the answer.


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