As some New Zealanders found in the 1970s, the late 1980s and to a lesser degree in the late 1990s house prices can fall in real terms. Other countries, such as the UK, have experienced even more pronounced weakness in their housing markets at stages over the last 20 years.
Prudent property investors need to ensure their ability to withstand falling prices and rents at some time in the future. People thinking of borrowing to buy a rental property should also factor monetary policy into their calculations. If inflation starts to gain momentum in New Zealand, interest rates, nominal and real, will have to be higher to keep that inflation in check.