'It's almost free to borrow': Low-interest rates driving house prices up - economist

An economist says low-interest rates are driving the price of housing and other assets up, with the Reserve Bank (RBNZ) last week saying property prices falling would be New Zealand's "worst-case scenario".

RBNZ chief economist Yuong Ha last week referred to house prices falling as a "deterioration of wealth", amid revelations a three-bedroom house in Auckland's Sunnynook had sold for $2.33 million on Thursday - more than double its capital value.

The RBNZ is preparing to implement never-before-used measures to drop interest rates for loans like mortgages even lower.

"Assets - of all kinds - are going up all around the world," Westpac chief economist Dominick Stephens told The AM Show.

"Why's it all going up? It's because Central Banks have reduced interest rates - it's almost free to borrow money."

Stephens said previous recessions had seen house prices fall.

"The difference between the current recession and all of the past ones is that we went into this with falling interest rates. [In] the early 1990s, late '90s, [and] 2009 we went into all of those recessions with rising interest rates.

"Those high-interest rates were actually the cause of the downturn in the housing market and the recession at that time."

He said interest rates needed to be set at the right level to offset any uncertainty.

"We've been struck by this big event - the pandemic - which is going to cause a recession. The trick is for the Reserve Bank to set interest rates at the right level.

"If they do too much we'll end up in inflation. If they do too little we'll end up in deflation." 

Stephens forecasts interest rates rising again will be a "long, long way off". However, people should still be cautious when it comes to borrowing, he said.

"You buy an asset - and it's for a long, long time. You need to make sure you can afford higher interest rates in time."