Matt Gilligan - Interest Rates / Banking / NZ Market Update

[outspoken]

Just an observation more than an opinion but:

The Worldwide sharemarket crash has been spectacular to say the least - drops of average 50% from the last highs. Why is that? Yet property (especially in NZ & AUS) has been affected mildly. Why is that?

Is it because the sharemarket is largely real Capital? i.e investors with real cash in the game, not largely leveraged, so the drop in value is a true reflection of the new values? Yes I know it's about market confidence too. The fact that those markets are very much affected by leveraged (property) securities probably didn't help. But the ones with the "skin" in the game are the people.

Whereas Property is almost always totally leveraged. Therefore the ones with the "skin" in the game are the banks? Yes the UK, Ireland, USA have suffered bigger drops, and therefore so have the people.

Seems to me the whole mess we find ourselves in is because "leverage" which is just debt + interest is applied to an asset class which makes it a very murky task indeed to find true value.
In fact one could say that the "leveraging" of property and subsequent bundling into securities on the derivitives markets has adversely affected the real productive sectors of all economies.

If you had to put your own real Capital into property to invest, I mean with no leverage would the prices be so out of touch with reality? wouldn't we all be better off? we'd have to save to own a House, and save harder to own more Houses so that those who didn't want to could still rent and that would be the investors retirement income?
Same could be said to run a business.

Leverage, the double edged sword, the thing that makes you hock yours or someone elses future labour and lifestyle to own a House. Who does it really benefit in the long run? and at what real cost?

I guess unless they change the game or the rules, one can decide to either play it or not?

[Matt Gilligan]

Just an observation more than an opinion but:


The Worldwide sharemarket crash has been spectacular to say the least - drops of average 50% from the last highs. Why is that? Yet property (especially in NZ & AUS) has been affected mildly. Why is that?

Is it because the sharemarket is largely real Capital? i.e investors with real cash in the game, not largely leveraged, so the drop in value is a true reflection of the new values? Yes I know it's about market confidence too. The fact that those markets are very much affected by leveraged (property) securities probably didn't help. But the ones with the "skin" in the game are the people.

Oh come on. Equities are STACKED with leverage. Look at Centro Properties ( big Aussie listed property Trust that fell from A$10+/share to 8c in 2 months over Xmas 08 - leveraged to the hilt 60% plus on $9b in property. Look at PGG Wrightson, - swimming in leverage at 65%; F & P - 55%+ leverage.

Both internally ( the corporates borrow to the max ) and externally the investors leverage borrowing to buy shares, using them as security and paying margin calls. So there is every bit as much leverage going on in equities as property.

The leveraged share investor has been the massive driver in the larger markets like the USA and Aussie.

But we don't see it in NZ - we Kiwis are in love with property and would not generally leverage a share portfolio. We see it as too dangerous.

Leverage makes the share markets off shore much more volatile. If you have 20% deposit on your shares and 80% debt, and the stock drops 10%, you lose 50% of your equity. So a bad result results in quick sell offs in markets like Aussie and the USA as a result.

Kiwis have been encouraged by conservative and unsophisticated financial products and services not to gear equities, and end up piled into property as a result. We just don't have the complex investing products they have over in Aussie.

Take the average broker over there in Sydney. They routinely buy a couple of pubs or businesses and drop their clients into a syndicated private venture; you don't see this wheeling and dealing so much in NZ. They offer ( in Aussie) heavily leveraged derivative and equity offerings...you get margin called if they go down....I don't know much about it cos I am a property guy, but we just don't have the sophistication in NZ in financial services they have over there.

This has partially softened the blow here in NZ.

Our banks are more risk adverse, resulting in less leverage at investor level, and as a result we are not as heavily leveraged as many foreign nations are in investment products. The low doc and no doc loans were not so prevalent in Australasia, especially NZ. (I'm not talking about consumer debt...we borrow to spend as a nation to live a lot.)

Anyway in summary, there is plenty of leverage in shares.

[outspoken]

But we don't see it in NZ - we Kiwis are in love with property and would not generally leverage a share portfolio. We see it as too dangerous

That's what I mean

Look at Centro Properties ( big Aussie listed property Trust that fell from A$10+/share to 8c in 2 months over Xmas 08 - leveraged to the hilt 60% plus on $9b in property. Look at PGG Wrightson, - swimming in leverage at 65%; F & P - 55%+ leverage.

Those are the Companies that are highly leveraged, I'm talking about the people that invest in those Companies.

externally the investors leverage borrowing to buy shares

I dont think they do, not in NZ anyway, and that's why....

we just don't have the sophistication in NZ - and this has partially saved us. Our banks are more security and as a result we are not as heavily leveraged as many foreign nations are in investment products.

All of that just emphasises my point that leverage is not such a good thing to find an assets true value. Less leverage = less damage to real values

and....

Who does it really benefit in the long run? and at what real cost?

But anyway, I've hijacked your thread away from your intended topic enough already, better stop or I'll get all philosophical on your .....
By the way....did you buy or get given a database from someone recently?

[tanmedia1]

I'm still at odds with the following:

"o 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."

Well, it doesn't make sense to me. Why is taking on debt for property (in a recession) sensible when costs are equally the same as renting (which is still the exception rather than the norm in many cases)? Surely you make money in recessions when you buy property for LESS than the cost of renting, particularly when asset deflation is pervasive. Or has that logic disappeared with the bath water.

[Matt Gilligan]

I'm still at odds with the following:

"o 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."

Well, it doesn't make sense to me. Why is taking on debt for property (in a recession) sensible when costs are equally the same as renting (which is still the exception rather than the norm in many cases)? Surely you make money in recessions when you buy assets for LESS than their market value, particularly when asset deflation is pervasive. Or has that logic disappeared with the bath water.

Because the asset will go up in value, and when it does you get the capital gain. Meantime it costs you nothing to own in cos rent = outgoings including interest.

So buy a property for $220k that was formally $320k, at mortgagee auction. Rent it and hold it on a fixed interest contract for 5 years. When the market recovers, you get the equity gain of $100k from the recovery.

Even if it takes 10 years, its a free $100k.

Or am I missing something ?...Let me guess your Japanese deflationary view of property. But thats in an aged population that is shrinking. NZ grows...we have underlying demand.

[Matt Gilligan]

That's what I mean
But anyway, I've hijacked your thread away from your intended topic enough already, better stop or I'll get all philosophical on your .....
By the way....did you buy or get given a database from someone recently?

Your not hijacking it, - I enjoy the discussion. PT is fantastic.

Database - no we have not got one recently, - just over the last 10 years and it has 28000 email addresses in it. We very rarely hit send to all - so that's probably why we hit you. We told the world we won Corporate Trustee of the Year last week and announced our Annual Tax Seminar.

Sorry if we spammed you with unwanted email. We are moving the DB into an auto responder shortly and the un/subscribe will be automated.

[tanmedia1]

Because the asset will go up in value, and when it does you get the capital gain. Meantime it costs you nothing to own in cos rent = outgoings including interest.

So buy a property for $220k that was formally $320k, at mortgagee auction. Rent it and hold it on a fixed interest contract for 5 years. When the market recovers, you get the equity gain of $100k from the recovery.

Even if it takes 10 years, its a free $100k.

Or am I missing something ?...Let me guess your Japanese deflationary view of property. But thats in an aged population that is shrinking. NZ grows...we have underlying demand.

OK.... I got it. I guess I'm one of those old school kind of guys who believes that property investing is a business, not a put on future value based on what has happened on the past (and in the face of the greatest asset bubble in human history).

And as for the Japanese, the aged popn is "increasing" not shrinking. They also pumped their economy with fiscal stimulus for 20 years.... and property is still falling. In a country which is still a "net saver", quite unlike NZ which is swimming in private debt. You can have all the demand in the world, but it doesn't mean jack if your citizens don't have two sticks to rub together.

I am one those rare Kiwis who does think that current accounts matter, and I think it is screamingly obvious why if you want to look at what has happened to countries such as the U.S., the U.K., Ireland and Iceland.

[Matt Gilligan]

I know Tan, - you just can't predict the future from the past. I mean property has been going up in value for 2000 years, but that's not trend. Nope don't be swayed by the tom foolery of past statistics.

Come on. Are you saying we won't see any recovery or any growth again in NZ or Aussie in the next 5 years ? 10 Years ? 20 Years ?

Remember I am talking about low end housing in NZ, and Aussie.

You can have all the demand in the world, but it doesn't mean jack if your citizens don't have two sticks to rub together.

Fair call. But Aussie and NZ are not that poor.

I thought Japan has a declining population and has had for years ?

[spurner]

Come on Matt, don't you get it? This time it is DIFFERENT!

[Matt Gilligan]

Come on Matt, don't you get it? This time it is DIFFERENT!

I heard that last recession and the one before. Its crap. Every recession its the same fear.

Banks and people are greedy. Loose credit will swing and come again. Right now its getting harder, and I agree it can get a LOT worse before it gets better. Writing off the bad debt from over geared markets, - massive write downs in asset values. Its not nice, but mostly its pension funds and it serves them right for trusting fund managers and the pack of non-truth telling forked tongued Wall Street bankers, and their subsidiaries.

But eventually it will pass, and banks will head back into growth mode and CEOS of banks will say open the cheque books again and take market share. Hopefully they will be more responsible next time and not lend to beneficiaries and unemployed in America.

Just look at the crooks we have seen in NZ recently Rod Petrecovich, Mark Bryers, Dan McEwan, - these guys were all ripping people off big time in listed entities in the 80's. People forget...but they stay greedy and it all happens again. And the finance companies, - borrowing off the public and lending to related parties galore. ( Bridge-corp, Hanover). Its all the same scam. Krukziemer did this with Metropolis junk bonds in the mid 90's, a repeat of the same theme of the 80's - its just keeps happening.


So I just totally disagree with this prevailing PT view that the financial world has fundamentally changed forever and we will enter a deflationary long term trend.

Banks will be as greedy as ever lusting after new customers within 5 years and people will be borrowing as much as they can and leveraging up another bubble, - its just cyclical. We are 2 years into the down cycle now.

Granted, this ones a monster crash. But the optimist in me says that just means a good recovery when it comes.

And in the meantime it costs me nothing to own these properties, they are positive cash flow 100% financed.

[tanmedia1]

I
Come on. Are you saying we won't see any recovery or any growth again in NZ or Aussie in the next 5 years ? 10 Years ? 20 Years ?




I ?

Of course it will recover, but I think it's not out of the question that the cost of buying will fall below the cost of renting. All I'm saying is that should be a "more sensible" approach to profiting from property in a recession, particularly in the one we're facing now.

I will concede that most people think like you, including people I know who are savvy investors. So I'm probably on the outer on this one, but I do believe my view has merit.

[Jabroni01]

So about these rates again.........

Who still feels they will be dropping (5 year rates I am talking about now).

Short term ones I can see falling in the interim but long term now ones hmmmm

Just read Tony Alexanders comments below:

If I Were a Borrower What Would I Do?
Given that wholesale long-term interest rates have risen a reasonable mount over the past month I've given
up hoping that I'll be able to get a 5.5% five-year fixed interest rate over the next few weeks. But I still think
there's a decent chance of somebody offering a rate below 6% with that view based upon an expectation
banks will start to offer more discounted interest rates over those longer terms as has traditionally happened
when interest rates start getting towards the bottom of their cycle. So for the moment I would still be either
floating or fixing for six months but looking to shift towards that five-year fixed rate some time almost
certainly before the middle of the year. Next week's revision of the official cash rate by the Reserve Bank is
probably worth waiting for if one is contemplating fixing at the moment just in case they cut interest rates more than we are expecting.

Jabs

[Bluekiwi]

I have mortgage fixed till Sep.

I was going to break when there was a 5 year rate with ASB of 5.5% (revised to below 6 now).

But suggestion here is to break now and go floating before the annoucement this week ?

And see whats best rate I can get from ASB for 5 year term.

[Heg]

Well I'm not fixing until after the OCR announcement and after the banks give their response announcements as to rate changes, - because they may knock a bit off the 5 year rates. But I doubt they will, and if they do I believe it will be a small change.

It's the floating and short term rates that will see benefit.

I believe we are nearing the bottom of the interest rate cycle for 4-5 yr rates and I will fixed long after this OCR. That's my pick.

Couldn't agree more. I've got one with ANZ due off fixed of 8.7% in May. I'm going to see where the 4 and 5 year rates go after Thursday and then lock a rate in (you can do this 60 days before your old term ends). I will also fix the one we have on floating too.

I believe it will become like the UK and floating rates will be lower than fixed rates for a good while to come.

[exnzpat]

Outspoken,

… Yet property (especially in NZ & AUS) has been affected mildly. Why is that?

The answer to your very good question

…we Kiwis are in love with property…

Come on, what was that? Americans, English and Europeans don’t love property? I love ice cream too – but it explains nothing about me. Matt’s answer is not one I would use to risk my financial future on. Because, believe it or not your question is the “right” question – and that question has already been answered by Kre8eve
http://www.propertytalk.com/forum/showthread.php?t=18903

Just remember this about Matt – he is selling something – his opinion is nothing more than a sales pitch. And judging by the depth of your post you actually know a lot more about this subject than Matt does. So, I say trust yourself—and at the end of the day –don’t forget -- it’s your money!