In mid-2022, it started to become clear for many central banks: There was an inflation problem. It was building fast. Left unchecked, it could end up worse than the 1970s. The dreaded term ‘stagflation’ began to appear in media headlines.

To support Covid lockdowns, governments around the world had relied on central banks to increase the money supply. When serious supply disruptions were added to the mix, by 2022, inflation was nearing 10% in many developed economies.

 

‘A Stagflation Christmas’. Source: Matthew Rutledge / Flickr

 

Since the Reserve Bank of New Zealand Act 1989, our central bank has used the blunt but effective tool of OCR increases to quell inflation. And avoid the dreaded spectre of stagflation.

We were actually the first country to use this approach. It has since been adopted by many other countries.

Here in New Zealand, our OCR reached 5.5% by May 2023 and remained at that level until August 2024. Today, it is down to 3.5%.

Of course, there’s one sector at the front of the line to be walloped by bank rate increases. The property sector. This is because property is generally leveraged. An increase in the cost of borrowing lowers demand.

Hence from 2022, we’ve seen property values fall. Worst-affected have been overvalued regions. Wellington saw some of the steepest falls as the public-servant workforce was reduced from 2024.

Meanwhile, we saw the same thing happen overseas. Highly indebted economies like Italy saw access to financing tighten. The price of one particular property stock we monitor fell to absolute bargain levels.

In the latter instance, this has proven to be a great time to buy.

Well, our logic in 2023 and 2024 was simple: Interest rates were peaking. The descent of rates back down would likely be a slow one — but inevitably, it would also see a lift in property values.

Let me share with you one of the property businesses we bought. How it has climbed back. Along with another example in the same market…

 

 

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