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  1. #1
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    Default Matt Gilligan - Interest Rates / Banking / NZ Market Update

    Sat 7 March 2009



    Matt Gilligan Housing And Economic Update - What to do with your interest rates / What's Going On Of Interest


    Hope this helps a few people out there. I will be sending it to my database next week.

    Matthew Gilligan CA



    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.


    I think 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: http://www.interest.co.nz/mortgages.asp - 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 an 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, or 1% every 100 days. Think about that.






    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 got 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 free. 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, numerous mortgage brokers telling me applications for new loans are rapidly rising. This despite the recession and doom and gloom.




    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 its as hot as 2007 around Frankston at present.
    So its 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 driven by affordability gains from the crash in values and cost of borrowing. In Aussie 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.


    Background Discussion and Opinion On Global Banking - only if your interested in a Matt Gilligan Rant

    I think we are going to see more banking failure this year and more pressure on big governments as the underwriters of failed institutions. Especially in the USA, but then this flows on worldwide as the whole world has funded America ( being teh reserve currency). So 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 the 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 gov't 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.


    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. 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 Zimbarwae 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 and 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 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 see 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. 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. Britian use a terrist loaw against Iceland, becuase it was broke that day. Unbelieveable and only 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 turmoils, 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. Hence they have asked for another $60b. Good work boys ! You Wall St guys deserve another bonus.


    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 teh Dow at 6850 and falling. All stock exchanges are going to take a caning this year, - so expect doom and gloom.



    Summary

    Many of you are investors (some large), many of you are simply home owners. You are all no doubt 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, - 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 time enjoying the low rate if we see a harder landing off shore emerge this year.
    In summary, 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.
    Last edited by Matt Gilligan; 07-03-2009 at 04:09 PM. Reason: formatting

  2. #2
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    Nice post and I agree rates long term may rise.

    Just a point to note if anyone is thinking of breaking a loan to fix longer term at a cheaper rate.

    If you do so after a RBA rate drop then your break fee will be higher. The gap between your current rate and new rate will be more so break fee will be higher also.

    My suggestion is if you are waiting to break and fix long term, then consider breaking now and placing on floating. Then if rate does drop at next RBA round the break fee will be slightly less.

  3. #3
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    Default Interest Rate Break Costs

    I have a break cost calculator, that I give to clients ( and friends) for free is anyone is interested.

    Email me [email protected] and I'll send it out. It identifies cost-benefit. IE Break cost v projected savings.

  4. #4
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    I agree Matt, I warned my forum members yesterday that long term rates are probably just past the bottom.

  5. #5
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    I don't follow the logic. I agree with everything said about the global economy, but that all points to deflation. In other words, mosts things will be cheaper tomorrow.

    So why buy anything (except food and petrol), let alone property?

  6. #6
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    Strong argument. I Agree and I may email this to my subscribers.

    I would add to grab a flexible product if you can get it with zero or no break fee for their fixed loans. I only know of one Aussie building society that does it but it has saved us alot of money recently.

    Or at very least a split fixed and variable loan.
    Last edited by Don and Liz; 07-03-2009 at 06:32 PM.

  7. #7
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    Sep 2008
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    Interesting comments above. My settlement date is the 8th of may, just after the NEXT OCR cut.... I guess I'm gambling by not locking in now, anybody else think we'll see 5.5-5.95 5 year terms again?

  8. #8
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    Like I said in another thread, Mike O you picked the bottom by locking in at 5.89% for 5 yrs...on ya mate! ;-)

    Throw your heart over the bar and your body will follow - Norman Vincent Peale

  9. #9

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    thanks matt for sharing comments and your rant..enjoyed the read.

  10. #10
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    [FONT=Arial]So its 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.
    A lot of money is made in recessions, but surely the money to be made out of property is when the cost of ownership is LOWER than the cost of renting. That's when it makes sense.
    Last edited by essence; 08-03-2009 at 09:43 AM. Reason: formatting correcting


 

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