Rural interest rates impacting the Rural Property Market early spring 2022

South Island rural real estate spring sales (August to October) equal $183m by value and 65 by number of farm sales, 44% down on the same time last year.

If anybody wants to quantify the rural real estate impact of the OCR moving from 0.25% to 3.5%, it looks like 49 fewer South Island farms sold from August to October compared to the same time last year. The median price is now $22,400/ha across 65 South Island sales, back 8.2% on last season’s early spring farm sales at 114 for a median of $24,400/ha. 

Dairy farm sales this spring have been slow to start and quite out of step with the quality of the inventory on the market. Dairy sales to the end of October (only two) have been slow to start this season, however, we still expect to see a positive upward shift in dairy sales in the run up to Christmas. 

Farmer borrowing costs have doubled over the last 12 months, and while access to rural credit has improved, the cost of it is weighing heavy on farmer and grower attitudes towards taking more risk. Last season was the reverse, where rural debt had never been cheaper but accessing it was not a given. 

Our view mirrors the NZAB team’s recent Farmers Weekly commentary on the Reserve Bank of NZ’s credit conditions survey, “that the acute rising cost of interest is creating a negative demand for rural credit.” We would also add limited early-season inquiries from potential buyers.

Many other factors are currently impacting farmer confidence, like He Waka Eke Noa, but these challenges are much longer term and unlikely to stop a well-capitalised sheep and beef farmer from buying the neighbouring farm on the boundary. Principally, we sense most farmers share Keith Woodford’s view that our primary industries, in general, and pastoral industries, in particular, are fundamental to NZ’s economic well-being.

The current policy settings must change and align with a shared national commitment to reduce GHG sustainably. Farmers alone can’t carry the burden of the current ‘net zero’ formula and the catastrophic future impact on rural land use. Not least because we are already at peak livestock production with critical supply chains and exports already in the balance. The opportunity for purchasers to negotiate terms to reflect the current economic reality is obvious.

The last decade has seen borrowed money get cheaper and cheaper. The current reversal of that theme is not short-term; anything that takes time to get there will take time to unwind. In relative terms, current borrowing is still very affordable when we look back. Property Brokers’ approach is time proven.

Where there is a genuine buyer interest in a farm, getting parties to the table and undertaking due diligence is paramount. We have vendors committed to a sale process and for those buyers prepared to operate this side of Christmas, finding value, as the market resets is the opportunity.

Equally, vendors that can read the market tea leaves and the forward outlook will appreciate that none of us control the market. As more inventory comes forward in 2023, the opportunity to make a contract work and a realistic return in today’s dollars is all part of making a decision. Money in the bank now means something again.

The default option to continue farming for another three to five seasons and wait for the market is likely to carry a bigger risk than the experience of the last three-plus seasons.

South Island rural real estate investment has historically demonstrated some of the best returns on capital nationally, and we don’t see that changing anytime soon.

For rural and lifestyle property advice from a national team of committed salespeople, supported by our expert marketing team, right across New Zealand, call 0800 367 5263 or visit pb.co.nz.