What the Heck is Happening With Interest Rates? [Practical Expert Advice for Investors & Homeowners]
Attention: This article contains time-sensitive advice and should be read today… It’s not the usual yada yada.
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Matthew Gilligan
Dear clients, friends and supporters,
This March 2009 Economic Update is intended to be practical and free advice on interest rates and a snapshot of the current housing market.
Also in this edition I have a bit of a rant about Wall Street and what could happen this year, if financial Armageddon continues.
I hope you find this information useful.
But First…The Plug
Unusual times call for unusual measures. So, for a limited time, I am offering investors and business owners a Free Strategy Interview (normally $199) with me and my team at GRA to discuss strategy, structures, family trust matters and asset planning…in fact anything on your agenda that might help you to protect and grow your net worth in 2009 .
If you live outside of Auckland…no problem, we can talk over the phone and work by email.
You’ll need to be quick so go ahead and contact me.
Finally, if you find value in my message below, I ask you to kindly forward this article to your mailing list 
OK, let’s get started…
Interest Rates & The Property Market
I wrote to a few of you last year in September and recommended you break your fixed interest contracts, anticipating an interest rate drop.
The basis of that was the G7 resolved to underwrite interbank lending rates, which is a big part of the cost of funds we borrow ( and represented in the Libor/interbank lending rates published internationally).
I suggested last year that the new government underwriting of institutional lending and deposits ( a reaction to the liquidity crisis on Wall St ) would quickly drop cost of funds and stabilise money markets short term.
As predicted, it happened.
Rates have plummeted world wide since this time. While obvious in hindsight , - the key was working it out early so you could break of fix contracts, before the banks react and you lose the advantage.
Many of you took the advice - one person alone told me she saved $50,000 in avoided break costs with her banks. Others waited, and have reported to me they regret the wait as they have had to pay huge amounts or it is now not economic to break fixed interest contracts.
So listen up again and do it now!
Changing Money Markets
I believe the money markets have changed in the last month, with five year rates on the rise despite an anticipated drop in the OCR due.
You need to be quick to react, if you wish to lock in the longer rates before they rise.
An emerging institutional theme will be - ’someone has to pay for socialising the losses - the taxpayer and interest payer’. Rates will rise accordingly in the near future. I discuss this further below.
Current Advice - Fix Long Now ( 5 Year Rates Are At The Bottom And Rising )
The 10 year average interest rate in NZ for main trading banks to home owners is just over circa 8%.
Current interest rates are well summarised here:
Interest.co.nz is a useful site for monitoring rates and financial news.
You can currently borrow for around 6.5% fixed for 5 years - this is cheap in a NZ context. I do not think it will get much cheaper, and now is a good time to start to grab the cheap rates in my view.
ASB hit 5.95% for a week in Feb, and have now increased their 5 year rate to 6.65%. I think the other banks will start to follow suit. Five year rates are roughly rising 1 basis point a day, of 1% every 100 days.
Think about that.
What are the Implications?
1. Borrowers:
I suggest you call your bank after the Thursday March the 12th OCR announcement, and consider locking in long rates AFTER your bank announces its reaction to the OCR drop. However if the OCR does not drop and NZ follows Aussie in this regard, - fix immediately long as rates may rise that day in those circumstances.
2. Deposit holders:
For those with fixed term deposits, short term rates will fall, long term will rise. You need to take a blend of long and short term deposit rates to remain flexible. Global banking may melt down again, you will want the higher rates if that happens, so don’t fix everything long as a deposit holder.
I have a consultant in the office who can give you a hand with it for free, if you want a hand making decisions. He is a broker for all banks and provides the service as complimentary. Go ahead and Email me for his contact.
Housing Recovery - Good News at Bottom End Of Housing
In case you have missed it, Australasian ‘low end residential’ property is recovering from a massive increase in new home buyers seeking bargains in a low interest environment.
Investors are also out in droves seeking bargains. I have numerous Real Estate agents telling me the lower to middle end is flat out again. Also, numerous mortgage brokers are telling me that applications for new loans are rapidly rising.
This despite the recession and doom and gloom.
Here’s some anecdotal feedback:-
1. Don Ha from Raywhyte in Manukau ( Auckland) told me yesterday he sold 66 properties in February - more than double last Feb’s result for him.
2. I have agents in North South and West Auckland telling me they are having the best months since mid 2007
3. I have similar feedback in Queenstown - multiple offers on houses inside $500k, with a listing shortage. ( Not to be confused with apartments in Queenstown which are crashing and entirely devalued.)
4. In South East Melbourne, my agent told me last Feb he sold 7 properties and this Feb he sold 35. One property he listed last week he expected to sell at $290k, and he got 9 offers on it in 2 days, with the first offer at $345k ! He says it’s as hot as 2007 around Frankston at present.
So it’s not all doom and gloom. A lot of money is made in recession and the low end is reaping rewards at present.
With cost of ownership roughly equal to cost of renting, - it makes sense.
One issue is while there are plenty of people wanting to buy - the banks are declining loans. Only the stronger can borrow at present.
So this is an Australasian wide, ‘bottom end’ residential recovery.
In NZ it’s driven by affordability gains from the crash in values and cost of borrowing.
In Aussie it’s driven by the same affordability factors but additionally stimulated by new home owner grants and big government spending on new housing.
Capital growth assets, apartments and leasehold assets are still crashed.
Quality commercial assets with great tenants are holding up, - marginal commercial asserts have crashed.
Global Banking - Read My Rave Below
I think we are going to see more banking failure this year and more pressure on big governments as the underwriters of failed institutions.
It will happen especially in the USA, but then this will flow on worldwide as the whole world has funded America ( being the reserve currency).
Therefore, if American institutions fail, the rest of the institutions lending come under huge pressure as they write off their losses.
A big spook on Wall St again, will push up interest rates globally - another reason to fix long and reduce risk.
Socialising the Losses
Of course the Western governments have decided to pick up the losses, - as letting the banks fail puts too much pressure on their economies. So the lesser of two evils it seems is ’socialising the losses’ and forcing the debts on the taxpayers.
Socialising the losses (making the masses pay for the titanic losses of failed banks) effectively means that the current working age population (and their children) are required to pay for the losses of the current banks and retiring baby boomers.
Rather than collapse the pension funds that invested in speculative and over valued assets like sub prime mortgages, and ruin baby boomers retirement, its ‘tax the workers time’. (I sound like a communist I know).
I think this is one of the biggest jack-ups of all times. The banks knew exactly what was going on - the credit bubble was paying Wall Street bank management massive bonuses and they let it run. The governments have failed taxpayers globally by not understanding it and allowing it to happen.
The affected taxpayers (of the debt ridden governments taking over the banks) now have to pay for the socialised losses through their taxes. In addition, eventually the cost of money will rise so the banks (owned by governments and private equity) can recoup their current losses.
So whether the losses are recovered through taxes, or high cost of funds over the long term - the burden comes on the next generation.
We (and our children) are going to have to pay for the poor decisions of bankers in the last decade. Does this mean that interest rates will be higher for the next decade? They must in my view - how else does it get paid off ? If the government won’t allow the banks to write off the debt for fear of depression, then the next generation has to pay off the losses through higher taxes, and higher interest rates.
It gets worse. To add insult to injury, - Wall Street banks have been paying out their bonuses for overseeing the biggest banking failure in history. There is only one word for it - they are a pack of ‘sods’ on Wall Street.
And that is putting it politely. Listen to this…One banker spent $1.2m refurbishing his bathroom, the month he applied for a bailout in October. One banker’s wife was quoted as economising, by choosing a cheaper fit out for the new corporate jet for the bank. An unbelievable disconnect from reality it seems has emerged in Wall St Banking management as to remuneration expectation and their worth.
Possibility of Hyperinflation
What happens when governments print money to pay their bills ? Their currency falls to be worthless, the banking system fails, and inflation becomes insane. Look at Zimbabwe and every other currency printer over time, except America.
America it seems, is allowed to pay its massive deficits with a printing machine. It does not have to pay its bills by borrowing the losses, or making goods and services to pay off its bills. It just prints cash.
Think about that.
The world is letting America print cash to pay its bills, without devaluing its currency and without inflation going wild. Watch this space - we could see the USD start to be heavily devalued and inflation go through the roof in the USA this year.
If this happens - its ‘game on’ in financial circles.
Interest rates will skyrocket globally, another reason to lock up long. And bad for exporters in NZ. Wine grower friends of mine should think about that.
Government Underwrites: Can They Pay?
Another thing to think about is that the world is increasingly questioning various governments to make good on their underwrites for failed banking institutions and business. Especially in America where eventually the world must ask the question:
‘Why is America allowed to print money to pay its bills and not suffer hyper inflation?’
The whole concept of the Fiat Currency - governments ability to print cash that is not backed by gold or a tangible asset, is in question at present. What happens if we find that some Western governments are unable to meet obligations?
Last year one of Britain’s members of treasury gaffed, and admitted publicly that Britain’s banking system was 3 hours from total systemic failure, with ATMs shutting down due to illiquidity.
It was only due to last minute emergency meetings literally at 5pm on a Friday that the unthinkable was averted.
Do you remember Britain using anti-terror legislation to lock up $2b in funds on deposit from Iceland at the time? Yes - Iceland is known for its mad military and Islamic population and global role in terrorism - not!
That’s how bad it was - governments were not playing by the rules as they were all in deep trouble. Britain use a terrorist law against Iceland, because it was broke that day. To me this is unbelievable and only happened 130 days ago.
These days are not over - the issues are still there.
In my view, we will see more of these unprecedented events this year in 2009 as the world works through the current turmoil, which is far from over.
AIG was loosing USD$500k a minute according to CNBC over Oct 08 to Jan 09. Do the maths. That’s (USD$30m) an hour , $720m a day, $21b a month. That’s why they have asked for another $60b.
Good work boys ! You Wall St guys deserve another bonus (yeah right).
I do believe the stock market (which is crashing again this week) will continue to crash all year.
A friend of mine is a private banker friend in EFG Bank in Singapore. He believes (and last year predicted) the Dow will free fall to the mid 5000’s, - down from 13,000+ if it fell through 7250. His predictions are right on track as we speak with the Dow at 6850 and falling.
All stock exchanges are going to take a caning this year, - so expect doom and gloom.
Summary and Recommendations
Some of you reading this are investors (some large). Some of you are simply home owners. You may be wondering what the cheapest interest rate will be for you over 5 years.
I would suggest that you consider starting to grab fixed rates for long term money after the next OCR drop this Thursday. Why? Because the 5 year rates will rise from here on out in 2009.
Wait till your bank announces its reaction - to a rate drop in the OCR. Then fix.
If the rate does not drop, fix immediately (Thursday morning before 11am) because the market has priced in an expected OCR drop and rates may instantly rise if the OCR stays at the current rate. You will need to be quick if that happens as it just has in Aussie.
If you want a ‘dollar each way’ and believe floating rates will stay very low due to the recession, - you could consider a floating for half your debt at say 4-5% ( the emerging floating rates) and take 5 year rate for say 6- 6.5%. This means you lock in 50% of your money safely for 5 years and can see what happens over coming months to floating and long term rates. But consider against this that these are uncertain times offshore, and 6.5% is 20% under the 10 year average rate of circa 8% in NZ. Its cheap money, and you will sail through rough times enjoying the low rate if we see a harder landing off shore emerge this year.
To conclude, call you bank in the next 2 weeks as they announce their reaction to the OCR drop, and fix long. We are at or near the bottom of the interest rate cycles.
If you want a hand, send me an email & I will introduce you to my broker on the floor.
Matthew Gilligan
Thank you for reading this.
Matthew Gilligan CA CPP
Director
Gilligan Rowe + Associates
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More Information?
If you have any questions or queries relating to asset protection or family trusts you can Request-A-Call for a no-risk chat or to set up an interview. Otherwise just call Matthew Gilligan, Partner of Gilligan Rowe & Associates Limited. Matthew can be contacted by emailing mg@gra.co.nz or telephoning (09) 522 7955.
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