Archive for the ‘Interest Rates & Loans’ Category

As I predicted today’s OCR announcement was a non-event and it stayed the same at 2.50%. Also unsurprisingly Dr Bollard the Reserve Bank Governor said the European issues are weighing heavily on the global economy and there is very little upwards pressure on interest rates currently. This is great news for borrowers. Some property investors argue that we have amongst the very highest Official Cash Rate in the OECD, which is correct.  However this has been the toughest economic time in terms of growth of our economy since the Great Depression finished in the 1930s.

The majority of investors who are still floating their loans will be happy that they will have low interest rates, and fixed rates have been creeping down a bit too.  The recent upwards move in the ANZ Flexi (revolving credit) facility to be at 5.86% and BNZ’s TotalMoney (pooling and offsetting account) base rate to be at 5.75% have taken effect to a number of investors.  It may well be prudent to fix a little bit more debt for longer terms like 2 or 3 years when good rates come up.  I have just fixed some 3 year debt at 5.95%.  Great discounts from banks are available to purchasers of my quality ~250 page property investment master course which I launched today.

An investment banker colleague of mine has just informed me that leading global credit ratings agency Standard and Poor’s (“S&P”) has just downgraded the credit ratings of our big four Australian banks and their new New Zealand subsidiaries by one notch from AA to AA-. This impacts ANZ and its sister bank National Bank, ASB, Westpac and BNZ.  S&P have cut Macquarie Bank’s rating by two notches to BBB.  However the impact is mitigated as S&P has undergone a ratings methodology change and downgraded virtually all banks around the world.

These seem big moves and could mean it costs a little bit more to fund our banks with a greater perceived risk meaning lenders to the banks will want a greater return.  This could push interest rates up slightly.  We will need to eagerly watch this.

S&P Ratings Methodology Change

S&P has cut these rating as part of its global review of bank ratings.  We have seen Belgium’s credit rating cut to AA this week by S&P, and the two other leading global ratings agencies Fitch and Moodys have been busy too.  Fitch cut Portugal’s debt to junk status and Moodys did the same for Hungary’s debt.  Greece’s debt has been junk for a while: >29% yields on their 10 year Government stock, but who wants to take on that level of risk to buy that!

The real issues in the Eurozone are not these smaller economies, but Spain and Italy that have over 7% yields on their 10 year Government stock implying a lot of risk from huge Government debt as a percentage of their country’s GDP.

OCR review next week

Our OCR gets reviewed next week and as I said in my interview to World TV two days ago, this is very likely to remain at 2.50%, however their is a reasonable chance it could be lowered to 2.25% and it is exceedingly improbable that the OCR would be raised!  I will blog on this on Thursday.

ASB have just offered some very well priced interest rates for 2 and 3 year fixed terms if the loan is drawn down prior to 11 December 2011:

• 2 year fixed rate = 5.80% (usually 6.00%)
• 3 year fixed rate = 5.95% (usually 6.30%)

On Thursday 27 October Reserve Bank Governor, Dr Alan Bollard held the OCR at 2.50%, which was very widely expected.

Dr Bollard said:

Domestic activity has continued to expand at only a modest pace despite relatively strong commodity prices. More recently, domestic business confidence has fallen back somewhat. Further ahead, earthquake repairs and reconstruction in Canterbury are still expected to provide significant impetus for demand.

As foreshadowed at the time of the September Monetary Policy Statement, there is a real risk that the European sovereign debt crisis could cause a further slowing in global activity, putting downward pressure on New Zealand’s commodity export prices. The difficult international market conditions could also result in increased New Zealand bank funding costs over the coming year.

Annual headline CPI inflation continues to be above the Bank’s 1 to 3 percent target band. That largely reflects the one-off effect of last year’s increase in the rate of GST. September quarter inflation data suggest that, once GST and other one-off influences have passed, underlying inflation is settling near 2 percent.

Given the ongoing global economic and financial risks, it remains prudent to continue to keep the OCR on hold at 2.5 percent for now. However, if global developments have only a mild impact on the New Zealand economy, it is likely that gradually increasing pressure on domestic resources will require future OCR increases.”

What this means for property investors

The impact has been swift with Westpac dropping their 1 year fixed interest to 5.85%, and Kiwibank dropped all of their fixed interest rates to 5.65% for 6 months and 1 year, 5.89% for 2 years fixed, a special short-time only rate of 5.99% for 30 months, 6.39% for 3 years, 6.79% for 4 years and 7.19% for 5 years fixed.  These are all market leading or equaling interest rates.  It is a competitive market so expect some of the other lenders to move their interest down in the coming week.   This will continue the flattening of the yield curve which will be exacerbated by pressure on banks to maintain margins which in turn helps them maintain high credit ratings, in the wake of increased borrowing costs banks have.  Over the next few months most investors will probably continue to float and take shorter term fixed interest rates, but as the months roll on, increasingly more investors will switch to fixed rates with medium and longer terms.

These are some interesting time in the interest rate markets with special rates being offered and a realisation that rates will stay low for longer.  Late last week HSBC Premier dropped their fixed interest rates to 5.49% for 6 months, 5.65% for 1 year, 6.10% for 2 years, 6.50% for 3 years, 7.05% for 4 years and 7.35% for 5 years fixed.  ANZ then announced their Rugby World Cup special rate (albeit one month into this wonderful tournament) with a market leading 5.50% fixed for 1 year, which their sister bank (the National Bank) has matched.

ANZ’s rate when combined with free home insurance for a year and a contribution towards legal and valuation fees makes this a popular rate choice.

Then Kiwibank this morning offered something truly special with a very low 30 month fixed loan rate of 5.99% – that is 11 basis points off the leading 2 year rate offered by HSBC Premier and 51 basis points off the leading 3 year rate, again offered by HSBC premier.  I think that this rate offers great value and if I had better service from my own experience with Kiwibank I would advocate them more, and they still charge higher fixed rate break fees (not that this rate will be easy to beat).

Whilst spreading your borrowings is still a good thing to do for certainty, you can afford to be overweight with shorter term 1 year fixed or less right now.  I am a big fan of offsetting loans like BNZ’s TotalMoney and the Kiwibank Offset Loan, and also revolving credit accounts.  The key is to not look at the loan facility limit and think I can go out and spend wildly as I have money in there.  Paying down debt is not a bad thing, particularly since you can redraw up to the limit to enable you options such as a buffer for repairs and maintenance costs, or to buy a great property producing cashflow that you can significantly add value to further increase your equity.

Rugby World Cup Semi-finals

Two big games this weekend with Wales vs France in semi-final 1 tomorrow 9pm at Eden Park, and semi-final 2 Sunday sees New Zealand play Australia 9pm at Eden Park.  I am picking a consistent and well coached Wales to beat France, and the All Blacks to beat the Wallabies to continue the Wallabies 12 losses in a row record on Eden Park.  A ground they play regularly on, but they haven’t won since 1986.  In fact the All Blacks haven’t lost since 1994 at Eden Park – making it the ultimate New Zealand rugby fortress.

New Zealand are favourites to win the match and the overall statistics are part of that reason.  The first official international between New Zealand and Australia was held in 1903.  Since then there have been 166 Tests between the Wallabies and All Blacks, and Australia has won just 47 at a percentage of just 29.81.  This is Australia’s worst sporting record against all countries.  Long may it continue.  Go the All Blacks on Sunday!

My book - in all leading bookstores this week

My book writing journey

I am delighted that my book Invest and Prosper With Property has been released into bookstores. I started writing the manuscript for this book in January 2010 with the purpose of answering my friends and family members questions on how to invest in property successfully.  I wanted to do a good job, so I decided to give a broad coverage of all property investment topics. After several hundred hours of work had been invested I decided I would like to have it published so I didn’t just sell a few hundred copies or have to give them away. I made the decision to seek out the services of a professional publisher. My friend Amy Hamilton-Chadwick was a professional editor and she edited the manuscript and gave me excellent feedback to make it more readable.  Then it was time to brief out my manuscript to publishers and having been told by so many people about how hard it is to get a big name publisher behind you I was expecting it to go the way of most of my offers on properties – rejected.  This was a most pleasant surprise to me and full credit to Jan Riley of Random House who introduced me to the publishing team.

I was most impressed with the professionalism of Random House from the outset, with their large Auckland presence, an enviable list of best-selling books, and their reputation as one of the very best non-fiction publishers (as well as fiction publishers) in New Zealand, and worldwide.  So I choose them and Random House have been excellent in distributing my work through bookstores nationwide.

Topics covered in my book

There are number of topics covered in my book as it is designed to function as manual for those wanting to invest in property or for those who already invest in property and wish to keep their knowledge up.

Chapter Line-up

1. Why should I invest?
2. Why should I invest in property?
3. What do I need to know to get started?
4. Could I really become seriously rich?
5. Should I buy commercial or residential property?
6. What do I need to know to be a great investor?
7. What kind of goals should I set for my success?
8. What investment strategy is best for me?
9. How to get a great deal
10. How to find great properties
11. How do I check out a property?
12. How do I structure my property ownership?
13. What do I do about paying tax or getting tax rebates?
14. How can I find the money to invest in property?
15. What is a revolving credit or offset account?
16. Fixed vs Floating interest rates
17. How can I save money on my mortgage?
18. What type of loan is right for me?
19. How to structure your loan
20. What do I need to know about accounting and taxation?
21. Depreciation: making it as simple as possible
22. Renovate, redecorate and revalue
23. What do I need to know about valuations?
24. Keeping your investment safe
25. Managing your property
26. How to minimise the risks
27. Don’t derail your own success
28. How to prepare an offer
29. Due diligence
30. Education
31. Useful websites
32. Glossary
33. Index

Sunday Star Times Book Review

Leading financial journalist Greg Ninness of the Sunday Star Times reviewed Invest and Prosper With Property in today’s business section:

OF ALL the useful advice contained in David Whitburn’s book Invest and Prosper With Property, one particular paragraph stands out.  It is a section of the second chapter which asks if property investing will be hard work. ‘The short answer is yes’ the book says…

Whitburn now works as a property mentor and is the president of the Auckland Property Investors Association.  The book draws on his experience, and of others he has seen succeed or fail, to provide a guide that should help investors avoid many common pitfalls and structure their activities in a way that will help them succeed.”

Where do I buy Invest and Prosper With Property?

Now this is available in all good bookstores nationwide with official release date being Friday 7 October 2011, but some bookstores have it already.  This is also sold by a few international online bookstores including a couple of physical bookstores in Australia too. Very shortly the book will be for sale on www.investandprosper.co.nz.

I think it will be an excellent investment for anyone wanting to improve their knowledge on property investment at $37.99, so firmly recommend that you buy it.  I also hope that you enjoy reading it as much as I enjoyed writing Invest and Prosper With Property.

David Whitburn – 2 October 2011

NZ downgraded to AA

Two of the big three international credit rating agencies, Fitch and Standard & Poors have given New Zealand sovereign credit downgrades from AA+ to AA.  They have reviewed the countries and their debts, and we are seen by them to have too much to justify our AA+ rating.  As a result we are downgraded.

Andrew Colquhoun, Fitch’s head of Asia-Pacific countries stated last night (NZ time):

New Zealand’s high level of net external debt is an outlier among rated peers – a key vulnerability that is likely to persist as the current account deficit is projected to widen again”

Main Issues

New Zealand has debt (ie. our country’s net external debt) at too high a level to justify our previous AA+ Fitch rating.  We were at 70% of annual gross domestic product (GDP) in the June 2011 quarter.  One of the biggest issues was household debt, where New Zealand has 150% household debt over household (disposable revenue).  This hasn’t changed since the global financial crisis hit in 2008.

The NZ Dollar has weakened in international markets falling to around 76.2 US cents at time of writing.  Nearly two months ago we were over 88 US cents.

Impact on Property Investors

There is a real risk that fear will grip in for a little while and banks lending policies tighten.  We still source around 40% of money lent in NZ from overseas, and the perceived risk will have gone up as a result of the Fitch downgrade.  Standard & Poors are the largest credit rating agency (who downgraded the United States of America famously to AA+ early last month), so we wait with baited breath as to what they will do.  The overseas funders are likely to expect a slightly higher return, so there is a real risk interest rates could rise a little bit to compensate them for this risk.

Some Good News

Fitch said the news isn’t totally bad with:

New Zealand remains well placed among the world’s highly rated sovereign credits, with its creditworthiness supported by moderate public indebtedness, fiscal prudence, and strong public institutions.”

No change in OCR

The Reserve Bank of New Zealand has just issued its September Monetary Policy Statement.  This was interesting as the RBNZ Governor, Dr Alan Bollard said:

If recent global developments have only a mild impact on the New Zealand economy, it is likely that the OCR will need to increase New Zealand’s suprisingly strong local economy remains largely at the mercy of developments in the troubled global economy and financial markets…

For now, given the recent intensification in global economic and financial risks, it is prudent to continue to hold the OCR at 2.5 per cent.”

This shows that whilst the New Zealand economy had performed “relatively well”, despite headline inflation increasing slightly since the last Monetary Policy Statement 3 months ago in June, we are increasingly part of a global economy and have terms dictated from overseas events.  With some leading French banks being given credit downgrades and other large European bank on negative ratings outlooks, and Greece looking like having a Sovereign bankruptcy, we have a volatile climate.  On speaking to leading financial commentator Bernard Hickey of Interest.co.nz over a beer on Tuesday night after our great debate at the Auckland Property Investors’ Association on the moot is property investment productive, he thought that there is even a chance that the OCR could drop.  I agree – however I think the status quo will be maintained for a while. However it is all just crystal ball gazing really such are the uncertain global macro-economic times we live in.  Dr Bollard acknowledged this with ”at the same time, however, global economic and financial risks have increased.”

On a micro-economic scale rents are rising in New Zealand on the whole slowly, with Auckland going up a bit faster on the back of increased demand from positive migration, and continued undersupply of new houses.

Below is the table of interest rates offered by the major trading banks and Kiwibank:

There are a number of international issues impacting property investors and business owners currently. These include:

• Greece’s debt crisis – Greece had its sovereign credit rating downgraded 3 notches from B to a total junk rating of CCC by Standard and Poors this week.  They are looking likely to default and will need an European Central Bank loan, investors in Greek Government bonds to take a hair cut, combined with Greece’s efforts of implementing higher taxes and slashing Government expenditure (hence the massive scale riots in Athens this week).
• weaker Australian job growth - Australian employment numbers released last week showed 7,800 jobs were added in May whereas 25,600 where expected.  Australia’s unemployment rate stayed at 4.9% (New Zealand is at 6.6%, USA is struggling still at 9.1%).  The Australian Dollar has been hit by international markets because of this.  The other impact is that this means the Reserve Bank of Australia is under less pressure to have the RBA raise the cash rate from 4.75% over the coming months.
• Japan’s continued struggles – these have been compounded by their devastating 9.0-magnitude earthquake and ensuing tsunami that devastated the north-east cost of Honshu Island on 11 March this year.  I watch CNBC a fair bit and note the comments by their Japanese correspondent, economist Takuji Okubo who has warned of political unrest in light of Japan continuing to have the highest level of public debt of all developed countries at over 200% of GDP.  Combined with deflation persisting, a reliance on exports to drive growth, and an aging and shrinking population are major long-term challenges for the economy.  The IMF has predicted Japan’s growth to shrink by 0.7% this year.

There is confidence coming back to NZ businesses, and the rural sector continues to be buoyed by very strong commodity prices. There should be an excellent turnout (well over 100,000 people) at Fieldays in Mystery Creek, Hamilton this weekend.  The NZ housing market is again being led by Auckland with another quarter of stronger sales, and prices having risen 4.1% in Auckland in the past 3 months.  Construction is heading into a deepening recession.

From meeting with Presidents at other property investor associations from around the country and looking at the QV and REINZ regional data, outside of Auckland house prices are essentially doing nothing.  Rents are moving up strongly in Auckland, and you are likely to be under-renting your 3 bedroom house in South and West Auckland if this is rented at less than $350/week.  With the OCR staying at 2.50%, there were fears of inflation meaning this would have to rise by the end of 2011. Whilst this of course could still happen it is less likely to in light of yet another significant Christchurch earthquake.