Podcast: Interest Rates Set to Fall Further | Ep. 201

Posted by Ed McKnight on 20/04/20
Interest Rates Set to Fall Further 001
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Show Notes

What's Covered in the Show?

In this episode, we discuss the Reserve Bank's announcement that it will use unconventional monetary policy to decrease interest rates further.

The Reserve Bank has announced a $30 billion programme to purchase government bonds on the secondary market. This programme will operate over 12 months to decrease long term interest rates.

The outcome for property investors is that more banks will be more willing to lend money at cheaper interest rates.

This Large Scale Asset Purchase (LSAP) programme should be welcome news to business owners and investors alike.

We also touch on the fact that landlords will likely convert short term rental accommodation – like Airbnbs – into standard residential tenancies. Many investors question what impact that will have on the rental market.

Our view is that in the main centres the impact will be little felt. That's because the supply of rentals is highly inelastic relative to demand. That means a large increase in supply can only have a small impact on prices.

Don't forget to follow us on instagram to receive regular updates about the New Zealand Property Market.


Transcript of the Podcast

Ed McKnight: Hello and welcome along to the Property Academy podcast. I'm your host Ed McKnight, and I'm Andrew Nicol, today on the show we are once again recording in isolation. That's why there's a slight delay there with Andrew based down in Christchurch, I'm up in Auckland and today on the show we are going to be talking about the reserve banks large scale asset purchasing program and what this means for real property investors based in New Zealand.

So what happened was, uh, those of you who recall a couple of weeks ago, the reserve bank came out, they cut the official cash rate by 75 basis points. They cut up from 1%, to 0.25%. Now, what happened? ANZ came out and they were actually the first and only bank at the time to start cutting their one year fixed rate, and they cut that down to 3.05%, uh, down about 40 odd basis points.

But then what happened was the reserve bank came out and said, well we didn't like the look of those cuts. We wanted something a bit bigger. So you're sure you pass them onto the, to the floating rates, but we want to see some bigger cuts. And what they said is that over the last couple of days, what's been happening to the government's long-term borrowing costs is they've been increasing. So government bonds, 10 year government bonds, which is what the government sells in order to, to, to borrow the price of that, or the interest rate increase from 1.1% to about 1.6% so, on some days it jumped up about 50 odd basis points.

So that's an issue because a lot of the mortgage, standard mortgage lending rates, uh, are set, uh, based on that long-term 10 year rate. And so even though the reserve bank made some big moves, some other levers in the economy were keeping those interest rates slightly higher. So what have the reserve bank come and done. They've said, okay, we're going to enter the bond market and we're going to start buying up government bonds.

Now what that's going to do is because there's more competition for, for buying bonds, it's going to lower that interest rate, and so we can already see that it's having an effect, even though it hasn't fully been implemented yet. This is a a 12 month long program, but it's already decreased then increase we've seen. And so what we're going to see is even lower interest rates. So that's really, they, the punchline of this for regular property investors because even though we saw that initial massive, unprecedented cut, uh, we didn't see that flowing through to, to, ah, lending rates that the reserve bank wanted.

So they've come out and said, well, we're going to introduce a 12 month program. We're going to buy up New Zealand government bonds. We're going to spend $30 billion doing that and in doing, so we're going to keep driving the interest rates lower. And that's going to help New Zealand businesses because then you can borrow at cheaper rates, and they're going to keep on coming out and doing what we call jawboning, jawboning is, when the governor of the reserve bank or the deputy governor come out and they say, look, we want banks to lend more. We want them to increase their lending. So, so this is one part of a package where we seeing the reserve bank coming out and trying to get banks to lend.

Now what else does this do if the reserve bank comes out and starts buying up government bonds? Well, one thing is that a lot of the banks will actually hold those government bonds. So if they sell them to the reserve bank, that gives them liquidity, and what that really means is they've got more cash because the reserve bank's just come and bought these bonds off them.

So that gives them more money, more cash that they can lend out to property investors, to businesses. Uh, and so that's another part of this. It's a bit of an unusual, uh method of monetary policy, but it's going to give more cash to the bank so they can lend.

So what are we seeing from that? What are the two things we're seeing? One, we're seeing lower interest rates, but then we are also seeing more liquidity within the bank so that they've got the ability to lend at these lower interest rates. Now that's why we are predicting significantly lower interest rates.

And actually we just saw HSBC come out today, the day of recording, and they've got new interest rates down to, I think it's 2.95% so they've, they've come under that 3% mark and we'd expect as well other banks to follow. What do you think has a mortgage broker Andrew?

Andrew Nicol: I've, I've just calculated, I've just gone through all the banks and had a look at who's offering the lowest for a few different terms. So the lowest one on the as Ed mentioned, is 2.95 and that's with the HSBC.

So if you take HSBC out of the equation and look at the prime banks, a 3.05 as available now at ANZ and ASB. Um, then if you go to the two year, rate 2.97 with Heartland bank, which is amazing. Um, or 3.3, five of your prime banks being BNZ and ANZ again. Um, and, and then if you go to the five year, rate um, and I, I don't know that many people would be fixing for five years at the moment, but if you wanted certainty, that could be an option at 3.7 with HSBC or 3.89. with ASB, which I mean under 4% for five years is pretty unheard of. When I fixed my five-year rate of 5.5% a few years ago, I thought I was doing pretty good.

Ed McKnight: And one of the reasons we're suggesting that you may not want to, uh, fix it five years is we're predicting that these rates are going to go even lower with the, this $30 billion package that's coming from the reserve bank buying up these government bonds. Are you expecting to see them fall even further Andrew?

Andrew Nicol: Absolutely and I would, I would always say negotiate with your bank. I mean, the ones, the rates that I'm talking about here, they are the carded rates. These are the advertised rates. Generally speaking, if you're using a mortgage broker or you're negotiating a reasonable size deal with a bank, you'll likely to get better than that. So, uh, I would definitely be using this time to really get a nice low interest rate.

Ed McKnight: Fantastic. Now, one of the things when we were talking about low interest rates in emailing this out to our database, uh, just last week we had one, uh, one of our clients come back and say, Oh, but I'm really worried about the rental market, and obviously lower interest rates aren't going to help if you don't have a tenant your house because you've still got expenses. Uh, Andrew, do you remember what the advice was in that situation?

Andrew Nicol: Yeah. So I've had this conversation actually quite a lot today. Uh, the, I, I've been ringing around my clients who are, uh, under construction, making sure everyone's okay. Their jobs are still secure, everything like that. Seeing if there's anything we can do. And, and the conversation inevitably comes back to tenants. Will they be tenants after this? Will, will there be people wanting to move into a new house, et cetera.

Now, there are certainly areas of New Zealand where there is going to be a change in the supply. Uh, so there are going to be properties put back onto the market that were once Airbnb, but because of the uncertainty around tourism, they will be converted into houses. Now, one thing to remember as a lot of these. Airbnb units will be rented out, furnished.

So that's probably a different market than what most of our clients get into, which is unfinished property. So that's one thing to consider. Um, having said that, you can easily move the furniture, put it into a lock up, and then move it back in later on, once the market settles down. But I think for the bulk of our clients they've bought in main locations, like Christchurch, Auckland, Wellington, Hamilton, where, there's a lot of industry. It's not tourism focused, and so they won't be as many Airbnbs to be re-entering the market, maybe Wellington has a bit, but probably, uh, probably not to the same extent as Queenstown, which will be drastically affected.

I think that Queenstown rents have been, uh, skewed for a long time. This is probably going to be a, a big adjustment for Queenstown. You're going to see a lot of Airbnbs re-enter the market, and that will create a much more supply and options for people. So you'll see a softening of the rents in that area.

Ed McKnight: And that again comes from just with Queenstown, 18% of Queenstown's GDP comes from the tourism sector. And with that dropping off you are going to see that kind of decrease. And the other thing I want to say as well is Queenstown's actual population is very very small, its resident population, is somewhere between, depending on how big of an area you're looking at, somewhere between 15 and 30,000 people.

And so, so having a large proportion of Airbnbs there coming onto the market could skew things there now and the other major centres, we're unlikely to see those same dynamics. Um, and I just want to harken back to a previous episode where we looked at, uh, over the, over the last year. And, and the likes, I think of Otago, uh, we saw a, uh, we saw a 20% increase in supply of rentals. We saw a 10% increase in demand for rentals, but prices still went up 5%.

Uh, and so, so what you, what we sometimes think or the danger we have is thinking that an increase in supply will automatically lead to decreases in house um, in rents. Now we may see a little bit, but what I'm trying to get across is that, uh, even when there are supply shifts and quite large increases in supply, it doesn't always translate to massive decreases in rent, uh, because, because of the way that demand and supply kind of shift.

Andrew Nicol: Um, I think also one other thing that I'd add, um, there Ed with somewhere like Queenstown, you've got a lot of tenants who are from overseas. So a lot of those people may have returned overseas now and, and they might not be coming back anytime soon. So all of a sudden you also have a lot less people who are, who are wanting to actually rent a house, whereas in your main centres, you've got a number of people in a number of different, uh, industries.

So you've still got, you've still got the demand as well. Um, and I think this is what, something that's really important when you are investing, uh, our investors are looking for areas where, ah, they've got a diverse range of people to rent to. And that's really important.

We saw this in the West Coast when they started closing coal mines. If you don't have a tenant you've really got a problem. Which is why you can't rely on single industries or even double industry centres.

Ed McKnight: Fantastic. Well, let's wrap it up the but please don't forget to rate review and subscribe to the show. It really does help us get the message out to more people, and hey if you're interested in property, want to learn more, why not check out our Instagram, uh, every second day we release a new carousel that just teaches you a little something more about the property market, or we've got a little update there, so I'm going to link that into the show notes.

Otherwise, we are at Opes_partners. thanks for listening to the Property Academy podcast. I'm your host Ed McKnight and I'm Andrew Nicol, and we're going to be back again tomorrow with even more daily strategies tactics and insights to help you get the most out of the New Zealand property market. Until next time.