Interest Rates

[Wellington Broker]

Two different things. First article compares 2016 to post-GFC environment. Second compares ASB profit over the last 6 months to their numbers from the worst six month period post GFC

[Camu]

Maybe I am naive and don't understand our banking system well enough but.. Considering a large portion of our banks are Austrlians owned - one would expect to have similar interest rates to our Australian cousins?

Why is it almost all of Austalian floating rates are significantly under 3.8%, while ours are upwards of 5%.

[McDuck]

Maybe I am naive and don't understand our banking system well enough but.. Considering a large portion of our banks are Austrlians owned - one would expect to have similar interest rates to our Australian cousins?

Why is it almost all of Austalian floating rates are significantly under 3.8%, while ours are upwards of 5%.

I'm guessing that it's about flows of money.
And that money isn't free to flow between Australia and New Zealand in quite the way you think.
If we had a common currency and common laws and government, ie Australia was a district of New Zealand, then your thinking would have some grounds.

[Camu]

I'm guessing that it's about flows of money.
And that money isn't free to flow between Australia and New Zealand in quite the way you think.
If we had a common currency and common laws and government, ie Australia was a district of New Zealand, then your thinking would have some grounds.

I understand that, but, the Aussie banks are claiming overseas funding is the sole reason, or very large portion of it, for our recent increase in interest rates. Surely there is more to it than they are letting on - especially after their profits are increasing. If they are just passing on their "cost of borrowing" surely their profit should remain similar to any other year?

I believe we do have a common currency though, in USD terms we are almost identical. Or laws and government are different and I don't know anything about the Australian system.

Anyhow, just a Saturday morning thought. I'm probably barking up the wrong tree. It's interesting to see other peoples points of view though!

[Lanthanide]

It's entirely consistent with what they're saying, though.

In Australia, they may have a much larger domestic funding source, so don't have to borrow internationally. In NZ, we have a comparatively smaller domestic funding source, so have to borrow more internationally. Hence higher prices.

Not saying this is the actual situation, but it's a pretty obvious way to interpret what they're saying.

[Davo36]

I don't see how overseas borrowing costs have anything to do with it actually.

Most of a mortgage is created out of thin air: https://en.wikipedia.org/wiki/Money_creation

Regarding bank profits, what's happeniing right now is they're increasing their margins since the amount of lending they've been doing is declining.

[McDuck]

I don't see how overseas borrowing costs have anything to do with it actually.

Most of a mortgage is created out of thin air: https://en.wikipedia.org/wiki/Money_creation
.

LOl. Well that's true in a way.
But since a loan is simply a promise to do something in the future, or someone will do something to you..
Isn't it common sense that a promise ( and an imagination of the future) are conjured up out of thin air.
Promises and imaginations (where the law and paper money are included) are much much more restricted.
The supply of money created for instance, is not unlimited, and the gfc taught everyone not to push it too far.

[Nick G]

Regarding bank profits, what's happeniing right now is they're increasing their margins since the amount of lending they've been doing is declining.

...and if they don't lots of people will be fired and replaced.

[McDuck]

...and if they don't lots of people will be fired and replaced.

Market share.
That was the buzz word for the last decade.. in all types of business activity.

The basic ( flawed ) concept was to get as many customers as possible.
The more customers, the bigger turnover, the more muscle you had to strong-arm any competition.

While an excellent strategy in peace and war, it's a total disaster in the hands of idiots.
Very similar to growing a non viable economy, achieved by importing immigrants and their money .

So now that the banks have created all these (thin margin) relationships with many many home owners, they find themselves in a world full of countries much less keen to see their money going off shore.

[alundracloud]

Was quoted these rates from Westpac on the 13th of February.

Loan is for just over $200k for an investment property.

	Interest rates include a discount off our carded rates of…	Interest Rate Offer (includes discount)
Choices Floating	-0.60%	5.05%
Choices Everyday Floating	-0.60%	5.05%
Choices Offset Floating	-0.60%	5.05%
6 months fixed	-0.45%	4.80%
1 year fixed	-0.55%	4.44%
18 months fixed	-0.45%	4.60%
2 years fixed	-0.55%	4.64%
3 years fixed	-0.40%	5.09%
4 years fixed	-0.45%	5.24%
5 years fixed	-0.45%	5.44%
1 year capped		5.15%
2 years capped		5.25%

[Don't believe the Hype]

Seems the rates have been stable for the past 6 weeks looking at the longer term rates offered.

[McDuck]

Seems the rates have been stable for the past 6 weeks looking at the longer term rates offered.

If the rates went up a few more percent, would that be a problem to anyone?

[Don't believe the Hype]

If the rates went up a few more percent, would that be a problem to anyone?

if you bought at a 3-4% gross yield at as high level of leverage a bank might allow you to a point or two could be the difference between holding your investment and needing to bail.

if you bought the average house in Auckland on 80% Finance around July/Aug 16 your mortgage is around $800k - rent $30k-$40k. Ignoring rates, insurance, maintenance and property management your int only annual interest payment should you want to lock in 5 years today based on the posted rates is around $43.5k before any princie repayment.

Thats between $5k and $15k negative which can be offset against other income given the right tax structure but even at the top tax rate that is still out of pocket $3k -$10k before all the costs I excluded at the start of this post.

im not familiar with AKL rates but PM ~10% of rent, maintenance about 7% of rent insurance another $1500... Likely to be not much change from another $10k down... $7k post tax at highest tax bracket

Now you need cashflow of $10-$17k before principle repayment to cover costs on an annual basis but the monthly cost is higher than 1/12 that no as you need to find the project before making your loss claim on the IRD in April the following year

Every 1% increase in mortgage rates takes this cost blowout up by $8k/yr pre and $6k/yr post tax.

[Beano]

If the rates went up a few more percent, would that be a problem to anyone?

Yes at 14pc i would lose money ! :-(
But I fixed for 2 years so i have time time to break my term deposits to reduce my debt

[McDuck]

Yes at 14pc i would lose money ! :-(
But I fixed for 2 years so i have time time to break my term deposits to reduce my debt

I guess if the rates went up a few percent most people would be fine.
And after those first real solid measurable set of numbers, you can only imagine the knock on effects.

So, say you imagined the first knock on effect to be a new house buyer borrowing a bit less from the bank.
Then the second knock on effect might be less upward pressure on house prices.

Might, - This is all just imagined situations remember.

The third knock on effect might be a slowdown in the increase in value of an investor's property portfolio.
A fourth knock on might be that property investors as a group drop out of the market to some extent.

That might lead to another reduction in the upward pressure on house prices.
It's a circular path of slowly decreasing prices, in this imagined series of events.

All just possibilities based on imaginations.

But as trump and Britex have taught us, anything can happen, and it usually does.