It is still a good time to buy a house, but mortgage holders should now look to fix their interest rates long-term to avoid "severe rate rises" brought about by inflation, Tower Investment CEO Sam Stubbs says.
Speaking in Auckland today, Stubbs said housing affordability is at a 7-year low and Tower's view is that will continue, especially in Auckland.
But inflation is the "100-pound gorilla in the room" that will impact the investment markets in the next 12 months, he said, and will rise sooner than expected.
Keeping interest rates low can cause inflation to rise which would work against the role of our Reserve Bank to meet its mandate of keeping inflation to between 1 and 3 per cent.
It's currently around 4 per cent following last year's GST rise but the Reserve Bank is forecasting the rate rising to 5.4 per cent in the June quarter before starting to fall back to 2 per cent by year's end.
Stubbs says central banks and governments have been "effectively working in collusion to keep interest rates lower than we normally would for longer than we normally would" because what really matters to them coming out of the global financial crisis is growth and employment.
"That is a legitimate strategy but the longer it goes on, the riskier the strategy becomes in terms of inflation coming out at the other end.
"It means that you'd likely to see interest rates go up sooner than later all around the world. You just saw that in the European central banks last week."
Mortgage holders should now take fixed longer-term rate mortgages, he says, because although floating rates look more attractive currently, "ultimately if interest rates go up, the severity of these rate rises and the speed by which they could come on would potentially make five-year-plus fixed mortgage look attractive right now".
On the other hand, investors and superannuitants should not keep long-term fixed-interest investments.
"We think you should be investing out in something like zero to 2 years because as attractive as [fixed] long-term interest rates may seem to you now, they'd look very unattractive when interest rates go up."
Stubbs says over the long-term there is only two ways for governments to deal with high debt - one is to default of keep inflation high. As a rule, they'd only default when inflation ceases to be an option.
"We think the majority of Western nations will choose to inflate their way to solve their debt problems and that's going to be bad news for fixed-interest investors and very good news for people who are on houses on mortgages.
"Inflation is the homeowners best long-term friend."