Cyclical v Structural change

[Damap]

What you are really saying I think Wayne, which is also my thought, is can this current situation be so different that all the "laws" of cycles are suspended for years or even permanently. It's a big call.........

[Wayne]

What you are really saying I think Wayne, which is also my thought, is can this current situation be so different that all the "laws" of cycles are suspended for years or even permanently. It's a big call.........

How long does something have to be different before it becomes the new norm?
As your article pointed out the US has borrowed so much that an increase of just a couple of % (what % increase is it from 0->2%? Gary?) increase could cause an issue or 2.

The US will drive what is 'normal'.
NZ will just follow.

I still struggle that this is the new norm.
To often in history people say - oh but it is different now.
Tulip rush
Rail Stocks
Tech Stocks
but this one is starting to go on a bit so just maybe ...

[Judge]

Damap, the laws of cycles may not be suspended necessarily (capitalism relies on boom and bust), but the cycles may be different. Instead of having rates hover around 7% (with the cycle going up and down around this number) we may have a cycle around 3%, with the cycle being 2 % at the low end of the cycle and the really high of 4% (wouldn't it be nice fellow property investors!). Who said the cycle has to be constant? Again, why should the rates in NZ be much higher than the rest of the developed world?

Also, apropos the rates in US and how they influence our long term rates... The rates in the US have been almost 0 for about 7 years now, but our long term rates were pretty high and somehow the low rates in the US did not filter into our long term rates. But now, when there is a talk about the rates in US going up everyone is saying that our rates will increase as well. Something does not add up. Either there is a direct correlation or there is not, and at the moment the indication is that the correlation may not be as direct as some suggest.

And i fully agree that even when the FED increases the rates it will not be by much. They cannot afford to pay interest on their debt at high rates, so there will be some sort of excuse to not increase the rates much.

And if i am correct, then perhaps the change in our rates is structural more than cyclical? The effects of innovation and lower energy use, and ability to do things faster and smarter are still filtering into the economies around the world. Deflation or zero inflation may stay with us for a while. And we do not need to talk in terms of change that happened "forever". A change in paradigm for the next 5-10 years is enough for us to make our decisions in respect of our property businesses. After 5-10 years there will be another change and another discussion. The question now is where are we heading in the near future.

[Damap]

I agree with you except about US interest rates. Their OCR has been low but their mortgage interest rates were around 6% in 2010, dropped below 4% in 2012

[Judge]

I agree with you except about US interest rates. Their OCR has been low but their mortgage interest rates were around 6% in 2010, dropped below 4% in 2012

Damap, i am not talking about relationship of FED rate to US mortgage rate. I am talking about relationship between FED rate and the NZ mortgage rate. When the FED rate went to .25% no one in NZ expected our long term rates to drop significantly. Now that the rate is about to increase, suddenly there is a panic that our rates will go up. I do not know what the right answer is, but it just seems inconsistent. Even if US rates go up, our banks will still be borrowing where the cheapest rate is, so they may borrow in EU rather than US, and EU is in a hell of a lot of trouble and they will be glad to park their money in NZ for a while yet, even if the rate is not great.

[Wayne]

Just as the RB change of our OCR should only affect short term (really floating) rates the change from the Fed should affect the same (in the US).
Longer rates have more to do with global growth and the ocean of cash that has been created.
Of more risk to us is the reversing of the QE that has happened - take away some of that spare cash.
I think the potential change in the Fed rate is seen as the start of that.
The correlation between the Fed and our longer rates is more complex than simply their cash rate.

[Judge]

Very interesting to re-read this discussion from almost 4 years ago now!!! Time flies indeed.

I think the jury is out, and we have indeed got a structural change in interest rates upon us. Does not look like the banks have accepted this yet as they still apply very high rates in terms of serviceability analysis, but once they relax their criteria accepting that rates will not go anywhere but down any time soon, it would be very bullish for property prices.

Essentially, i think we can say hand on heart that the world has changed. Of course any change is temporary, until another change arrives, but for now - hopefully 2.99% interest rates by end of the year???