Ungaro&Co

2012 – Crystal ball gazing…

January 20th, 2012

Welcome to 2012!

I shall skip the usual fluffy rubbish that most people post at the beginning of the year and go straight to the facts:

• Last year was a bit tough for some, especially those in Christchurch. The ironic spin-off of this however, was that the Reserve Bank had an opportunity to save face, and reduce the official cash rate (which was already too high in my opinion).
• The global financial crisis (affectionately known as the GFC), manifested itself more in Europe compared to the US. As it is one of NZ trading partners, this will affect us somewhat, but as long as the Chinese market is a bigger focus of our exporters going forward, I wouldnt worry too much about this story from a home-owners perspective.
• European concerns and Christchurch shakes, will likely prolong low interest rates in NZ. I have a few theories as to why this is the case, but they are only theories – my best guess however is that we will have low interest rates for most of this year.
• When floating rates do increase (and they will, one day), the increases will be modest – this is due to fact that the bulk of borrowers are now floating, so any adjustment in the OCR will have a huge impact on the household sector.
• Redundancies may increase this year - the funny thing about where we are in the economic cycle, is that if we are in a recovery mode, there is actually less job security. This is because most SME’s that have survived the last few years are in the beginning stages of growth, and this is where they make the bulk of their human resource ’adjustments’. Check your insurance policies, and make sure that you have redundancy insurance included (note that most income protection policies do not have this built in).

Re-Fix Me!

We have launched (what I believe to be) the only online ‘re-fixing of your mortgage’ tool on the market – and it is completely free!

If you:

1. Currently have a floating mortgage
2. Have a fixed mortgage that is about to expire

And you bank with ASB, Westpac, ANZ, National Bank, or Sovereign Home Loans. You can now visit http://www.ungaro.co.nz/refix-me and request a re-fix of all, or some of your loan. Once we receive your request, we automatically negotiate on your behalf with your current lender. If we can get you a better deal elsewhere, we’ll tell you about it – but if you want to stay with your current bank, that’s okay too.

Interest rate updates:

You can now find the most up to date comments on interest rates on our Facebook page – please search Ungaro & Co on facebook and become a fan, to receive these updates.

Some strategies for floating rate borrowers:

There are two main strategies I would suggest and the usual disclaimer applies – please seek specific advice from us before making a decision on your mortgage structure:

1 – Float everything, and when the time is right, fix for a decent period of time.

2 – Fix at least half of your mortgage, for a long term like 4 to 5 years. This represents good historical value, and whilst you will still pay more to do this, at least you have locked in some good long term rates and you are not 100% exposed. This would not be a sensible option however, if you were thinking of selling in the short to medium term.

There is no magic loan structure to suit everyone and I often find that after a quick phone call to talk about it, you will know a bit more so don’t hesitate to call.

 

 

Confusion continues over rates.

September 23rd, 2011

What about now – is it time to fix my mortgage yet?
I must say it is encouraging to see the “alarmist chatter” like this is being replaced by sound commentary like this with regards to what is happening (or not) with interest rates. There is however, still a lot of press given to economists, who have proven themselves to be wrong with their predictions more than a few times now.
To put it simply, it is unlikely that the OCR will increase, just as I have been saying for 2 yrs now, significantly, for another year.

The banks at the moment are making a killing as their cost of funds are ridiculously low compared to what they are on-lending to us consumers right now. You could say there is a wee bit of silent collusion similar to that of the oil companies going on – it is in all of their best interest to keep things higher than what they would otherwise be (pardon the pun).
In the next 12 months you may see two trends emerge:
1 – Floating rates may increase.
2 – Fixed rates may decrease.
3 – You may be able to borrow on any fixed/floating terms you want, as long as it is 6%
On point 2 and 3 I will elaborate a bit.
Swap rates (effectively the wholesale costs to the lenders for fixed rates) are decreasing right now. This may lead to carded-rate discounting on the fixed rates (2 yrs plus) very soon. The yield curve is “flattening”. This means that it is not always going to be more expensive to borrow for 5 yrs compared to borrowing on a 1 yr term. For many years in NZ actually, the yield curve was inverse, meaning that it was more expensive to fix than to float. That is why I believe, with some of my heart, that pretty soon we may see fixed rates for any term, close to 6%, and this may occur around the same time as the floating rate increases. Read some of my earlier blogs to see why this would occur.
When you are ready to fix or discuss your options, please get in touch. We will give you advice on your options on fixed rates, and we can also advise you of your options with other lenders – now is an excellent time to consider changing banks as there is no cost do to this if you are on floating. Talk to us about all of your options and if you are ready to make a move, visit our “RE-FIX ME!” page.
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INFLATION – what is it, how do we get it, how we control it?

There is a strong relationship with inflation and interest rates. In order to understand why and when floating interest rates will increase, it is very important to understand what inflation is, how it occurs, and how it is controlled. Without an understanding of inflation, it is likely that what we see in the media will be taken at face value and we may make financial decisions that are not well informed. What I hope to do here is explain, in a little more detail than what I would normally do, what inflation is. It’s particularly important right now to understand this if you’re considering fixing your mortgage.
1 What is Inflation – it’s simply defined as being the dilution of the purchasing power of a dollar. Reference
The average inflation rate from 1915 until 2010, is 4.67%.
Put another way… Inflation is the ‘pressure’ of money in a system – the system being the economy. The more money you have in a system, the higher the pressure and the more economic activity you have. Just like with water pressure – the more water (money) you jam into your pipes and the faster it flows around your house (the economy), the stronger your shower and more expensive your water and power bill.
A couple of other terms you may have heard of:
• The ‘demand pull’ theory implies that as there is more demand for goods and services, the price levels increase .(As a result of higher prices, you need more income to live off and therefore there is pressure on wages (and the more you earn, the more you spend).
• The wage-price spiral. This occurs when there is a general increase in prices followed shortly afterwards by pressure from employees, requiring pay rise, to keep up with the rising cost of living. When the wage-price spiral occurs, you end up with uncontrollable accelerated rates of inflation.
• The Phillips Curve. There is generally believed to be a (short-term) inverse relationship between periods of high inflation and low unemployment. This occurs as all resources, including the labor force, become fully utilized when the economy heats up. The point here is that if unemployment is still high, it is unlikely you will see genuine inflationary pressure.
Short term inflation is actually not that bad, as it indicates an underlying increase in economic activity. Longer term however, inflation can erode purchasing power as it effectively dilutes the value of the currency (as stated in my simple definition above). Every developed economy has measures in place to control inflation – NZ has two formal ways that inflation can be controlled by the powers that be – fiscal and monetary policy (see point 3)
2 – What is the CPI?
The Consumer Price Index (CPI) was 5.3% to June 2011. The CPI measures the price changes (expressed as a percentage) in an average “basket of goods and services”. Things like food, non-food groceries, electricity, gas, tobacco, alcoholic drinks, newspapers, Internet, cellphones, rental cars, and domestic and international air travel. The prices of the goods and services in this basket are measured and compared to previous periods. So the recent CPI figure indicates that the dollar is 5.3% less effective compared to the previous measurement. Interesting fact is that mortgage interest costs are not included in the CPI basket of goods and services. Almost 2% of the above figure could be explained by the GST increase last year, but if the mortgage interest cost was also included (which has decreased significantly over the past 3 yrs) I suspect the CPI would be much, much lower than what it currently is.

3 – How do we control inflation?

There are two things the government can use to control inflation: Fiscal and monetary policy.
Fiscal policy is effectively tax policy and government spending – this either puts money in or takes money out of the economy and (depending on what people groups benefit/suffer the most) can spur on spending via what is called the ‘multiplier effect’ – every extra dollar that someone gets in their back pocket usually leads to greater than one dollar being spent – inflation pressures result.
Monetary policy is what we as financial advisers, are mostly pre-occupied with. The government, via the reserve bank, indirectly influences the cost of money and the availability of money, through changes in the OCR (official cash rate), which is the interbank lending rate – this influences the interest rates that we pay on floating rate home loans.
Changing the OCR is the most formal way that the Reserve Bank (RBNZ) influences monetary policy and controls inflation. The most common informal method, is what is sometimes hear referred to as ‘jawboning’ or moral suasion – this is when the RBNZ governor effectively ‘threatens’ to increase/decrease the cash rate in the form of commentary on OCR announcement dates (Refer to this one on 28/7 this year). In NZ especially, where the media will swing left one day and right the other, we are more sensitive to what the governor says, compared to what he does – and the markets (and dollar) react accordingly.
In summary…
1. If there is a rise in Official Cash Rate (OCR) then,
2. There may be a rise in floating interest rates. *Note fixed rates are not always influenced by OCR.
3. This increases the cost of living for the average householder. Note middle class only targeted by rising interest rates as upper class usually just end up earning more interest on investments.
4. A decrease in consumer spending and decrease in demand for housing stock occurs as mortgages become more expensive.
5. Downward pressure on prices and retailers discount to move stock. Downward pressure on house prices may result and rents will likely increase.
6. Less aggressive repayment of debt occurs and is replaced with higher servicing cost of debt.

Don’t rush into fixing…

June 24th, 2011

 When should I fix my mortgage?

There is talk about rising inflation, and that this inflation will trigger a rise in the OCR earlier than expected. The people making these comments are the same people that predicted the NZD would fall to below 40 cents US about 3 yrs ago – chief economists at banks!

Even the reserve bank governor is warning of a rise sooner than expected – this is his attempt at merely ‘talking the market down’ and may not actually be what he intends on doing. It is common practice to bark louder than bite in order to stear the economy ever so slightly to where you want it to go.

These two sources of mild misinformation is causing many to pre-maturely fix their mortgage when ideally they should remain floating (even if it increases slightly).

Inflation is rising…apparently. The recent CPI is 5.3% – this is well above the target range that the reserve bank has of 1 – 3%. I suspect that if mortgage interest cost was included in the basket of goods and services used in the CPI figure, the CPI would be much, much lower than what it currently is. If the CPI was adjusted for this, along with the impacts of the GST rise last year, I do not think the RBNZ would need to threaten to increase rates. Besides, if the OCR increased, the NZD would trade even higher than it already is.

In my opinion (and it is only opinion), the reserve bank would be wise to keep the OCR constant – that’s what I think they “should” do – what they may end up doing however, is increasing it sooner than expected – not because it is based on sound economics, but because that is what people expect will happen – thanks in most part to sensationalised media and biased reports from bank economists.

In summary, in the next 6 months, you MAY want to consider fixing some, or part of your mortgage – you must be prepared however to have an increase in your mortgage costs right away, as interest rates for fixed rate lending (from 2 yrs plus) is around .50% more expensive.

I have been advising my clients all very differently on this matter – there is no one solution that will work for everyone - for some people it would be wise to stay on floating, even if there is an increase in rates as the average of the floating rate in the next couple of years will likely be equal to the current 2 yr rate. For others, it may be prudent to fix all of their lending right away – or half of it, for as long as they can afford. It largely depends on your attitude to risk – you take a risk by staying on floating and also by fixing.
IMPORTANT NOTE ON FIXED RATES – Fixed rate interest rates in NZ are influenced by the laws of supply and demand. Recently fixed rates increased and then shortly afterwards, they decreased – this was largely due to fluctuations in wholesale rates due to volatile happenings offshore – many people misread this as the beginning of the rises that have been predicted by the media.

One other thing to be aware of is this simple rule: When things are optimistic in NZ, the floating rates will eventually increase (I do not think we are there yet), and when things are optimistic overseas, the fixed rates will eventually decrease. With what is happening in Europe and especially in the US, it is very doubtful in the short term that fixed rate lending will decrease – but in the medium to long term, a decrease in fixed rate lending COULD occur around the same time as and increase in floating lending in NZ – just a theory of mine but food for thought.

When you are ready to fix or discuss your options, please get in touch. We can not ony give you advice on your options on fixed rates, but we can also advise you of your options with other lenders – now is an excellent time to consider changing banks as there is no cost do to this if you are on floating. Talk to us about all of your options.

UPDATE on new financial adviser legislation

Great news for all – Financial advisers, regardless of what they advise on (be it mortgages, insurances or investments) are now much more accountable on the advice they provide.

You have three options when choosing financial advisers now

1. Registered Financial Advisers: All advisers are required by law to be registered and most mortgage and insurance advisers will fall under this category.  Many are currently registered, but are working on becoming authorised.
2. Authorised Financial Advisers: This is a much higher standard which requires higher educational requirements, regular audits, and severe penalties on advisers for getting it wrong.
3. Qualifying Financial Entity Advisers (QFE Advisers): This is like being an Authorised financial adviser, but the adviser comes under the authority of another entity – usually a bank or an insurance company – and this larger institution provides the framework to operate efficiently in the new environment.

I (Darcy Ungaro) am a QFE adviser – this means I have to act and behave in a similar fashion to an authorised financial adviser (AFA) and have the same obligations to my clients that and AFA has, but I rely on the framework provided to me by a larger financial institution – in my case I use Sovereign. They are the only financial institution that has offered this to independant advisers without losing the ability to access other lenders or insurers. I see this as the most efficient way to provide a standard of advice similar to an AFA clients. As this is just the beginning of regulation, the criteria will no doubt become more difficult as time goes on.

As part of the new legislation that kicks in today (1st of July), we are now required to provide a disclosure document and a scope of service document at the first opportunity – this provides a much great degree of transparency around how we operate as advisers – watch this space for further updates.

This has been the best time to purchase property.

And will still be a good time to purchase for at least another year.

Providing you purchase property for the old fashioned idea of ‘somewhere to live’ and you are not a speculator/developer, the last few years has been the best buying environment that I have ever seen.

1 - Interest rates are the lowest they have been, for the longest amount of time so far.

Refer to this graph:

2 – Property prices are still (nationally, on average) 5.7% below the market peak of 2007.

Refer to this site 

3- Lending criteria is now back up to 95% with most lenders. Providing you are a good borrower, you should be able to qualify no problem. Talk to us first, before you talk with any bank as results vary depending on who you talk with at the moment!

4- There is a decrease in housing stock (with Christchurch) and immigration is fairly constant.

Refer to this graph

If you are waiting for things to get any better than it already is, you will miss out!

We specialize in helping people purchase property – this may be for the first time, or may be for the 10^th time – If you are at all in a position to purchase property (or another property), please get in contact with us to see what we can do to get you ready to purchase.

Steady as she goes…

April 21st, 2011

Great news for borrowers on floating, or short term fixed rates. Floating interest rates are now some of the lowest in NZ history. My advice for the bulk of my clients (in the last 3 yrs now) is to stay on floating – It won’t always be the case of course but for the short to medium term, floating interest rates are the way to go (even if they increase slightly from where they are now).

Being on a floating rate requires a little bit more care than being on fixed – you don’t want to be carried away with the higher rates when they eventually come. You will know that the end of cheap floating rates is nigh, when you see three signs: First: Watch out for high inflation figures. We are seeing this currently but this is because of high commodity prices and changes to GST etc. – it isn’t because of house price inflation and therefore not something that the reserve bank can influence via the official cash rate. Second: Watch out for low unemployment rates. Again the unemployment rate is actually quite low already – this data does not accurately reflect those who have been asked by their employers to work part time or reduced hours however. Third: Watch out for optimism! Yes the evil optimism that causes us to feel happy and confident – it causes us to purchase new cars, houses and boats etc., which will flow on to more inflationary pressure.

Right now I cannot see these three signs and I doubt very much they will be around in any great quantity for at least another year.

Keep visiting this site to keep informed and for more specific info, please contact us.

Watch latest video interest rate update here.

Hot tips for the auction floor…

I’ve mentioned before that if you want to know the state of the property market – talk to real estate agents. Right now it appears that properties are moving faster and there seems to be more sales out there – always a shortage of listings, and signs that some properties are selling above market expectations. This will no doubt be reported in the media in another month or so once some solid data comes out – but definitely signs of life out there at open homes. Auctions are also becoming popular a vehicle again for selling property – especially when the market is still finding its feet.

Many buyers I know freak out at the idea of purchasing a property on the auction floor. It can be quite stressful, but I suspect a lot of the anxiety stems from making decisions from emotions, rather than logic – Here’s a hot tip, if you may be bidding at an auction:

Write down 3 figures:
1 -What you would like to get the property for?
2- What is most that you are willing to pay for it?
3 – What is the most that someone else would pay for the property?

This will help take the emotion out of bidding, and keep you grounded in a decision that you have made previously, under calm circumstances. The other benefit of these 3 questions, is that it helps with your market education – ie., if you consistently guess number 3 correctly, you will know the value of comparable properties next time around and your chances of paying a fair price (or getting a good deal) increase.

Are you insuring the most important things?

If you were to name your assets, in order of most valuable, to least valuable, what would that list look like?

Most people, when I ask them this, state that their most expensive asset is their house, then contents, then usually car – they usually always miss one of the most important assets however. The [financial] definition of an asset is something that can produce an income/return. By this definition, only the house (above) is truly an asset as it could be rented out to produce a return. What about you? Are you an asset? According to this definition you are very much an asset – in fact, you would be worth close to $7.2m!* *assuming income of $100k pa, a 10% return on investment (ignoring income growth), and a 20 yr income stream.

There are 4 main categories of risk:

1. Likely event, but low magnitude loss (eg contents insurance, car insurance, GP visits on health insurance).

2. Unlikely event, low magnitude loss (travel insurance, redundancy insurance – except for right now!).

3. Unlikely event, high magnitude loss (life insurance, house insurance).

4. Likely event, high magnitude loss. (Critical illness insurance, income protection, major medical insurance).

For some reason in NZ, it is more likely that categories 1 and 2 will be covered and 3 and 4 are not dealt with (except house insurance) – this is totally backwards. I have never met anyone yet who likes insurance and no one has an unlimited budget in this area. If your budget is finite and you are the most valuable asset that you currently own however (and you are), is it not logical to start with you first, and then everything else is a luxury?

Mortgage Update…

February 10th, 2011

Interest Rates Decline…

Great news for borrowers on floating, or short term fixed rates. Floating interest rates are now some of the lowest in NZ history. My advice for the bulk of my clients (in the last 3 yrs now) is to stay on floating – It won’t always be the case of course but for the short to medium term, floating interest rates are the way to go. Keep visiting this site to keep informed and for more specific info, please contact us.

How to keep banking profits in New Zealand…

If you bank with one of the main banks, then every time you get a mortgage from them directly, apart from wages they pay to employees, the bulk of the revenue generated from you is shipped off overseas to their major shareholders. We have a clever solution however to ensure some of this is diverted back to NZ. Use a mortgage a mortgage adviser! Why?

• It costs you nothing.
• We get paid from your bank, and then we spend the money locally (mostly on things like coffee and new shirts on Ponsonby Rd).
• You get advice from professionals – all day long we think about mortgages!
• You have access to our service outside of banking hours.
• We are experts in negotiating the best deal for you.
• We’ll likely be here for you next time around also (we don’t often get promoted internally!)

As mortgage advisers, we often find that clients have an assumption that once they’re set up, there’s no longer anything we can do for them. Nothing can be further from the truth! In reality, what we have to offer in terms of advice and guidance, changes as your knowledge and experience changes. In short, any decisions you make on loan structure, buying and selling and negotiations on interest rates – talk to us before you talk to your bank.

Good times for floating rate borrowers…

A couple of weeks back the reserve bank governor reduced the OCR. This led to a whopping 0.50% decrease to most floating rate home loans.

I mentioned in June of last year with the first of the OCR increases, that the lever had potentially been pulled too early. In hindsight, I couldn’t have been more correct! The very fact that the housing market is still in a virtual stalemate (nationwide), shows that people are simply ‘hanging on’ if they can afford to do so, as the confidence is simply not there to make their next move. Now that interest rates are lower, there may be a little more confidence injected (albeit misguided confidence) that could stimulate the housing sector enough to help jump-start the economy.

Unfortunately the catalyst for this decrease has been Christchurch – it does not seem fair now that their pain is our gain.

If you are on a floating rate home loan – well done, you must have received some good advice about this! Most clients that I have dealt with over the last 2 yrs have opted for floating rate home loans when the options were clearly explained to them. There may be a time however in the future, when fixed rate home loans are the way to go again, but not yet. I would suggest that anyone who is on floating rate home loans regularly read these updates (and other sources like www.nzier.org.nz) for updates on where the OCR is going. Before doing anything with your mortgage, please contact us for specific advice about your needs.

Save the change – handy tip on how to use new trick…

ASB have a great new(ish) feature for their customers called “save the change”. They round up whatever your transactions are and put the difference into one of your nominated savings account (yes you do have to be an ASB customer for this). For those on floating mortgages, every time you have a bit of savings, you can make a lump sum payment – nice and easy. We have personally paid off an extra $2k off our mortgage since “save the change” came out – it’s great.

I’m not suggesting of course that everyone switches to ASB for this one benefit of course! This is just one example however of what some of the banks are starting to do in the area of innovation and it’s great to see.

The Light at the end of the tunnel?

December 17th, 2010

Are we there yet, are we finally out of the dark and gloomy woods?

I’m starting to believe that the pieces are in place for a banking led, housing market recovery.

When it comes to educating yourself about the housing market, if you read the Herald or watch the news on this subject, you would likely believe:

• The official cash rate controls the interest rates.
• Property prices have crashed and are continuing to fall.
• Our dollar will soon come down.

The only deception worse than a lie, is a partial truth (like the above).

In reality, New Zealand is a fairly ‘closed system’ – it doesn’t take much stimulus, to trigger growth (or decline) in a sector of the economy.

With the housing sector you have immigration, employment activity, and lending criteria – these are the big three factors in my opinion (there are other factors like inflation, interest rates, tax legislation etc. also, but minor in comparison). It’s the lending criteria however, which I see as the single biggest factor affecting a turnaround in the property sector. Lose criteria from lenders effectively fed the flame of the previous housing boom and subsequent spending of our artificial equity on consumer goods. In the last 2-3 years, I have seen a massive change in the way banks assess applications for finance (buyers of apartments, lending to self-employed people and businesses, and first home buyers were hardest hit). There was also a multiplier effect happening – for every dollar not lent to someone, more than a dollar was not being spent in the economy.

So what’s changed to make me so optimistic?

Here’s what I see happening at the moment:

• Commission rates paid to mortgage brokers are increasing.
• Banks are discounting their interest rates aggressively.
• Banks are taking us out to lunch again – it’s a miracle!!
• Property prices in city fringe areas (areas like Ponsonby, Grey Lynn especially) have still shown growth.
• First home buyers with 5% deposit are obtaining finance!

Banks obviously have an interest in making sure the property market in NZ does not fall – they do not want the value of their security declining. So what’s the best way to make sure their security portfolio is stable? Pump money into the pockets of people who compete to own it!

So yes, perhaps we are out of the woods! I wouldn’t go out and by 10 investment properties and an Aston Martin just yet, but if you have more than 20% equity in your existing home and about $1,000/month in surplus, reliable income – then now is the time to buy an investment property or your first home.

Watch our latest YouTube mortgage update here.

And now for something completely contradictory!

You cannot accuse me of not being balanced now.

A recent report, made available through the NZIER, will give you another perspective on the economy, with a lot more detail. You can read the full report here or here is a quick summary of the main points:

1. The economic recovery may not be as strong in 2011, but could be stronger than expected growth in 2012.
2. Unemployment rate is stabilising, but will likely improve more in 2012.
3. Trade balance to weaken further (we will spend more on imports than what we earn in exports).
4. Policy changes and changes to GST likely to drive inflation in 2011.
5. Inflation will swallow up the effects of wage increases.
6. NZD will likely stay where it is at until 2013 where it will see a slight ‘dip’.

Happy New Year!

2011 is going to be a fantastic year – there is a hint of real optimism with the main Aussie banks in particular, and because of my belief (as above), we are gearing up to handle more work than ever next year. If you would like to catch up this year to see what your options are, or simply to review your current mortgage, then let us know.

Is now the time to act?

November 22nd, 2010

The case for a drop in the Official Cash Rate

I strongly believe that the official cash rate should be decreased – to something like 2 or 2.5%. Here’s why:

1. There’s relatively high unemployment (not even including those on reduced hours)
2. The government is currently spending more than it’s receiving via taxation revenue.
3. We are still clearly in recession.
4. Our currency is appreciating — real story here is the decline of US dollar however. I hate to think how high it would be if our economy was thriving!
5. Exporters are suffering due to high dollar — hard to have export led recovery in this environment.
6. A lower OCR would potentially lead to lower floating rate home loans, which would assist in a household led recovery.

If the cash rate was reduced, then:

1. Our dollar becomes less attractive.
2. Our dollar then depreciates.
3. Export earnings increase.
4. Floating rate mortgages would therefore also decrease (ignoring the domestic funding crisis that banks are currently going through).
5. Households have more income.
6. Consumer spending increases.

This is highly simplified, but hopefully you can see a little how this could work.

Six months from now it will be a lot easier to comment on what is currently going on right now in the world’s financial system – it would be an understatement to say that it’s interesting times indeed!

Now is the time!!

Sheep are funny creatures – we have a few of them and it’s always interesting to watch them move around the paddock being led by their collective unconsciousness. There’s never any real leader in our flock that I can tell, but as a group they all seem pretty confident of where they’re going. You can see where I am going here…

For those of you in secure employment and more than 20% equity in your existing home – Wake up! Now is the time to buy an additional property. Don’t wait until the rest of the flock figure this out as you would have missed the low point in the market. Here are two, very simple reasons why now is the time:

1. Property prices are not likely going to drop more than 5% in Auckland (my best guess).
2. Interest rates have likely bottomed out and lenders are desperate to meet their lending targets right now – there are deals to be had with money!

I see two odd things happening right now however:

1. Risk takers (who have difficulty obtaining finance in times like these) are trying desperately to buy property right now – they feel it is the right time but don’t have the capacity to act.
2. People on great income, with good equity, in a great position to move on an investment property – are doing nothing (apart from watching the rest of the flock to see who’ll move first).

If you are part of the second group – be bold, and break away from the flock – it’s the best decision you’ll make! Consider residential property investment as part of your overall strategy way to achieve your retirement goals*. For a lot less than what you might think, you may be able to provide a good source of passive income to supplement your other sources in retirement.

*Talking to an investment adviser would be advisable, or visit www.sorted.co.nz for more information on ways to plan for your retirement. We are not investment advisers but can assist you with working out the numbers.

Youtube Video Interest Rate updates.

For those of you with a short attention span like me, please go here to subscribe to my 2 minute interest rate updates:

News Flash – cash rate unchanged at 3%

October 5th, 2010

THIS MORNING’S ANNOUNCEMENT – 28/10/10 – courtesy of ANZ private banking

The key theme of this morning’s statement was that the economy continues to track along the RBNZ’s subdued growth path they outlined in their previous OCR statement:

“Despite some data turning out weaker than projected, the medium-term outlook for the New Zealand economy remains broadly in line with that assumed at the time of the September Monetary Policy Statement.”

Once again the RBNZ highlights that they see clear downside risks to global and domestic growth. However, these risks are balanced by the good growth seen in China, Australia and our other Asian trading partners, as well as strong commodity prices.

The inflationary effects of the increase in GST are again addressed by the RBNZ. They see the subdued state of domestic demand preventing any long term inflationary effects from recent tax changes. This minimal inflationary impact reduces any pressures to raise the OCR:

Headline inflation is expected to move higher following the recent increase in the rate of GST. The subdued state of domestic demand suggests this inflation spike will have limited impact on medium-term inflation expectations.

Overall, the language used by the RBNZ still continues to be very downbeat. While they do still see the need for higher OCR rates in the future, they dampen expectations down quite strongly: (emphasis added):

“Overall, continued GDP growth is expected to gradually absorb current surplus capacity over the next few years”

“While it is appropriate to keep the OCR on hold today, it remains likely that further removal of monetary policy support will be required at some stage.”

Tax Changes – what are you doing with your 1%?

I recently went to a presentation from a major player in private wealth management in New Zealand – won’t say who they were simply because I have not asked permission to release this info!

Here is the estimated impact of some of the tax changes to your disposable income (assuming income is greater than $85k):

• Personal income tax = approx 4% better off.
• Rise in GST = approx 2% worse off.
• Change in depreciation rules = about 1% worse off.
• Net impact = almost 1% better off.

So what are you doing with your 1%? It sounds like a really pathetic amount, but if you had a mortgage of $400k and you were earning $100k pa – you could effectively save $65k on your mortgage.*

*$400k mortgage over 30 yrs at 7% costs $557k in interest. If payments were increased by $1,000 pa, the interest bill decreases by $65k and you will become debt free 3 years faster.

Double Dip – Here we come!?

I have just received (at the time of writing 5/10/10), a media release from NZIER outlining a summary of recent economic data – it is a bit disturbing I’m afraid. The NZIER recently stated that we have simply gone through a ‘soft patch’ in the path of economic recovery – the recent data however suggests that the economy may again be in decline.

There has been no evidence of a pre-GST spend up, construction and financial services (ouch!) are down, and business profitability is deteriorating sharply. On the positive side hiring and investment intentions remain resilient for business.

“Activity contracted and expectations are being revised down. The recovery continues to disappoint optimistic expectations. Seasonally adjusted business confidence fell from 26% to -9%, the first negative reading in a year. Renewed weakness in activity, profits and a shallow recovery have depressed confidence,” – Shamubeel Eaqub (principal economist at NZIER).

What does this mean for you and for me as homeowners and heavily in debt (I’m assuming you are too!) – floating interest rates are likely to remain low for another 6 months at least. This is assuming the OCR stays where it is. In my opinion the OCR should be decreased (and not just put on hold) ASAP, to stimulate more of a housing led recovery.

Breakeven analysis – a clever way to determine which fixed rate strategy is best…

Breakeven analysis – In the context of a “fixing your mortgage” strategy, this refers to the point in time in which you are better off fixing for a certain rate over a certain period of time, compared to another option. This exercise assumes that fixing is the right thing to do – which for many people still, it is not. I recently read a great example from ANZ’s Property Focus article recently – you can refer to this article, which I have effectively copied and altered to reflect current advertised interest rates with ANZ.

This is an example: if the one-year interest rate is 6.45% and the two-year rate is 6.69%, we can use this to imply a breakeven one-year rate in one-year’s time of 6.93%.

In other words, if we choose to fix for one-year at 6.45%, and in one-year’s time we then re-fix at a rate less than 6.93%, we will have made a better decision than fixing for two-years at 6.69%, and vice versa.

Because of the effect of compounding, it is not equal to exactly 6.93%, but it is very close, and the rough rule of thumb goes like this: two-years at the two-year rate = 2 x 6.69% = 13.38%.

Therefore, if we know two-years will cost 13.38% interest in total, what does that imply for the second year? The answer is: 13.38% in total less the first year at 6.45% = 13.38% – 6.45% = 6.93%. Again, I am not suggesting you go out there and fix – seek advice specific to your situation.

YouTube mortgage updates:

Keep informed on the mortgage market in a slightly less than tedious way than reading – view here:

Breakeven Analysis – a broker’s secret weapon…

August 31st, 2010

Breakeven analysis – a clever way to determine which fixed rate strategy is best…

Breakeven analysis – In the context of a “fixing your mortgage” strategy, this refers to the point in time in which you are better off fixing for a certain rate over a certain period of time, compared to another option. This exercise assumes that fixing is the right thing to do – which for many people still, it is not. I recently read a great example from ANZ’s Property Focus article recently – you can refer to this article here, which I have effectively copied and altered to reflect current advertised interest rates with ANZ.

This is an example: If the one-year interest rate is 6.45% and the two-year rate is 6.69%, we can use this to imply a breakeven one-year rate in one-year’s time of 6.93%.

In other words, if we choose to fix for one-year at 6.45%, and in one-year’s time we then re-fix at a rate less than 6.93%, we will have made a better decision than fixing for two-years at 6.69%, and vice versa.

Because of the effect of compounding, it is not equal to exactly 6.93%, but it is very close, and the rough rule of thumb goes like this: two-years at the two-year rate = 2 x 6.69% = 13.38%.

Therefore, if we know two-years will cost 13.38% interest in total, what does that imply for the second year? The answer is: 13.38% in total less the first year at 6.45% = 13.38% – 6.45% = 6.93%. Again, I am not suggesting you go out there and fix – seek advice specific to your situation.

YouTube mortgage updates:

This week we have the launch of an exciting new service for borrowers – mortgage updates via YouTube. The information contained in these videos will help current, or prospective borrowers, to keep informed on the latest happenings with interest rates. We would always suggest that you seek specific advice from us before making decisions on your loan structure. The purpose of these updates however, is to give you an inside look into what is going on from a source which is more reliable than the media - this tool in invaluable! To subscribe to these updates, please click here. Here is the latest one:

Information is power – be careful where you get yours from!

The Reserve Bank governor, the chief economists at your local bank, your financial adviser, experts who appear on TV– what do they all have in common?

They want to further their own careers!

I would love to think the people we hold up as experts are altruistic in the sense they genuinely want to give away the truth regardless of whether or not it benefits their income. That’s just not the case however – their words of advice will more often be congruent with their own career paths rather than accurate economic analysis. Here are some examples:

1. The Reserve bank governor will talk the market up or down to influence economic activity because if he is successful, this will reflect well on his career. This involves making public comments designed to stimulate activity or discourage it – note these comments have been proven by history to be incorrect, but effective just the same in accomplishing his purpose.
2. Economic commentators (at best, journalists), appearing on TV telling you what is effectively economic gossip– in order to provide entertaining television. If it bleeds, it leads – if the facts are boring, or difficult to explain, leave it out – it’s just not good TV otherwise!
3. The chief economist at your local bank. The commentary is effectively aimed at shareholders of the bank to set correct expectations within their organization. Banks have very short term profit targets, so the type of economic information suitable to shareholders may not be a suitable information for the types of decisions you and I need to make.
4. Financial Advisers (and I will not even remove myself from this criticism)have to receive commission for remuneration (as most consumers will not pay for this advice). For this reason, any economic commentary which has product placement within it is usually slightly biased.

I believe it is a great tragedy that many people in NZ are taking advice regarding home ownership, business speculation, and retirement planning, from people who don’t believe in home ownership themselves, or are people that have non-disclosed agendas.

I see two fantastic sources of quality information growing in popularity however, which I believe (and hope!) will result in better information and therefore more power in the hands of people like you and me. Online media sources like Facebook business pages and Linkedin (where people can enter into discussion/debate) and NZIER (a truly independent, not for profit economic research centre). The latter in particular, especially in the last 2 years, has had, in my opinion the most accurate predictions on how this global financial crisis has played out in NZ– learn more about NZIER here.

So what I am trying to say is this: In this current environment, the quality of the information you believe is likely the single most powerful thing that will influence your personal wealth in the next 2 years. Be careful what you believe in the mainstream media about the NZ housing market in particular.

Interest rates – what is happening?

I am watching this area with interest (had to be done) at the moment. It is not all that important in the scheme of things, but nonetheless, it does provide some amusement with all the dynamics at play right now. Last blog I wrote about how the increases in the OCR in a market environment of natural decreases to fixed rates, are counterintuitive in the medium to long term. In light of further decreases to fixed rates last week, I believe this even more! I also think the governor has increased the rates way ahead of any schedule and should not only hold off on any further increases on the 16^th of September, but should actually decrease the OCR instead. He never reads my blogs though so I’m not holding my breath.

Anyway, to answer the question – what is happening? I do not believe we will see further rises to the OCR (which effectively means no more increases to floating and short term fixed rates), but there is still a slight chance that the fixed rates (anything greater than 18 months) will decrease even further over the next 6-9 months.

I have a mortgage that is coming up for renewal in October. My plan is that I will hold off on re-fixing, until I see a 3 yr fixed rate in the mid 6% range. The floating is still cheaper than most fixed rates, but there will be a time soon I believe, where the fixed rates may again be cheaper than the floating – These low fixed rates will be around only briefly however, so you would have to act fast when you see it (because the local forces of supply and demand can actually push up interest rates independently of international swap rates).

Your mortgage structure decisions should be in line with your wider financial goals and any move should not be based on attempts to pick low points in the market. I would suggest that you seek advice from us, prior to making any decisions on your fixed rates – phone calls are free!

That’s it for now – I will leave you with some wise words the 3^rd wealthiest man in the world.

“Be fearful when others are greedy and be greedy when others are fearful.” Warren Buffet

Here’s is how it works – if the one-year interest rate is 6.45% and the two-year rate is 6.69%, we can use this to imply a breakeven one-year rate in one-year’s time of 6.93%.

In other words, if we choose to fix for one-year at 6.45%, and in one-year’s time we then refix at a rate less than 6.93%, we will have made a better decision than fixing for two-years at 6.69%, and vice versa.

Because of the effect of compounding, it is not equal to exactly 6.93%, but it is very close, and the rough rule of thumb goes like this: two-years at the two-year rate = 2 x 6.69% = 13.38%.

However, if we know two-years will cost 13.38% interest in total, what does that imply for the second year? The answer is: 13.38% in total less the first year at 6.45% = 13.38% – 6.45% = 6.93%. Make sense?

It’s Official – Reserve Bank Losing Control.

July 29th, 2010

It’s Official – Reserve Bank losing control.

For the second time in a very short period of time, the official cash rate has increased- now at 3.00%.

Around 2.5 years ago, floating interest rates kept on increasing – due to repetitive rises in the OCR – this was all in the name of attempting to control inflation. The theory is, if you increase the biggest cost to households, they will be able to spend less on buying bigger houses and flat screen TV’s, resulting in a slowdown of the rising inflation rate. The main reason why it had to go up so far and so fast was largely due to the fact that no one really had floating rate mortgages (the type of mortgage that is directly influenced by changes in OCR). The reserve bank governor was very effectively increasing the cost of something that no one had – all it really did was push up our dollar, which made those flat screen TV’s even cheaper!

So here we are in 2010, in the midst of what I would consider the second trough of a W-shaped recession, and the OCR is being increased. I would guess that the majority of borrowers are now on floating interest rates (most of my clients are) – any increase in the OCR will have a fairly immediate effect on the spending behavior of households right now. I would suggest that the bulk of households are quite sensitive to OCR adjustments – now more than ever. Apart from kicking us while we’re down, the Reserve Bank may be destroying the most important lever it has in controlling inflation.

Everyone being on floating interest rates is actually a good position for the governor to have us in. The catch is however, as soon as the floating interest rates are roughly on par with fixed interest rates (and that gap is closing on both ends), borrowers will swap from floating to fixed, and the effectiveness of the OCR once again is diminished – The Reserve Bank governor will once again lose control of the inflation rate.

So what strategy would I suggest to my clients?

As usual, I would suggest individuals seek individual advice. What I am seeing at the moment however is the possibility that the fixed interest rates may actually DECREASE over the next couple of years. There may be a point in time (perhaps in the next year) where you can have any interest rate option you want, as long as it is 6.5%. At the point where the fixed rates equal the floating rate, then perhaps this is the point in time to swap over. This is of course, assuming that you are not planning on selling.

Read some more here and here. Still wondering what the OCR is? Click here.

What’s the true cost of your discount?

I watched a fantastic episode of Country Calendar recently – click here to view. A handful of fruit and vege growers in Northland got together to form a farmer’s market in Whangarei as the supermarket chains were pushing them hard on their margins. The supermarkets goal is to provide top quality fruit and vegetables to consumers at competitive prices – and produce a profit for their shareholders. These two forces are diametrically opposed – in this video, the growers ended up dealing direct with the consumers just to survive. The temptation is to blame those evil supermarket shareholders who are just after the profit – in reality however, the consumer needs to share in a little bit of the blame also.

In the lending industry, you see the same dynamics at work also. Banks have a directive to maximize profit for their shareholders, and provide (ideally) the lowest cost home loans possible. Here is just one story (click here) of how one of the banks, BNZ, dealt with things during the height of the property market in the name of “increasing efficiency”. As consumers, we are constantly out for the ‘best deal’ on our interest rates. If the banks have an opposite objective of maximizing its profit – who get’s squeezed? In the case with BNZ, we as mortgage brokers were squeezed out entirely about 6 yrs ago (in the name of providing a ‘cheaper deal’ for consumers but in reality, it was to maximize profit). In the article above, about half of its mobile lenders were made redundant just like that – not everyone was ‘better off’ with that move.

Having said all this, I’m all about getting the best deal for my clients – but there comes a point where you have to put it all in perspective. How important is saving about $4/wk (difference between $400k at 7% vs 6.95%) on your home loan – It isn’t much to you and me, but to a bank with profit targets, this could potentially mean the difference in of one full time staff member when all is added up. So I’ve decided to stop watching Country Calendar – at this rate I would have to forfeit my Act party membership!

Trauma Insurance – ever heard of it??

This phrase ‘trauma insurance’ (aka ‘critical illness’ or ‘living assurance’ conjures up all sorts of images I’m sure. You may think it is what happens when you off work due to illness, you may think it is like medical insurance, you may not be thinking at all at this stage though – just killing time until your boss looks over your shoulder?

1 in 5 men and 1 in 7 women will suffer a critical illness critical illness between the ages of 30 and 64 – every day, 52 people in NZ are diagnosed with cancer.

Trauma insurance is a lump sum of cash that is paid to you (assuming you have this insurance!) upon the diagnosis of any one of the covered serious illnesses (cancer, heart disease and stroke are the big three). It’s not so much about how it works though – it’s actually about the difference that having this insurance makes. You can take time off work, you can pay for treatment options that your medical insurance may not pay for, travel overseas, pay off mortgage etc – totally up to you. I am a massive fan of this type of insurance more than any other type because of the simple fact that it seems to pay out more often. I have heard of many stories where people have become seriously sick, and received a big chunk of cash. It doesn’t make the sickness go away, but it gives you loads of options.

If you have insurance cover, but are uncertain as to what it does, perhaps it’s time to get an adviser, like us, to review it. If nothing else, we’ll simply be reminding you why you have it.

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