Blog: The Landlord says...

One of the great things about watching interest rates is the poker game that goes on between the central bank and markets from time to time.

Yesterday’s official cash rate announcement was one of those games.

Everyone agrees we are somewhere near the bottom of this part of the economic cycle, therefore the new question becomes when are things going to turn and when will rates start to rise again?

Following the previous OCR announcement we have seen tentative signs of a very modest recovery; this positive news sent all the economists rushing off to make new predictions about rate rises.

We have seen this through our Experts’ Views on www.mortgagerates.co.nz section where all sorts of scenarios are developed and argued. Few, in fact only one, argued for further cuts.

It seems to be the role of the wholesale financial markets to anticipate Reserve Bank governor Alan Bollard’s next move.

Most had decided he was done cutting the OCR, so their next question was when is he going to start hiking?

Yesterday’s statement illustrates how they have a built-in tendency to get ahead of themselves.

Bollard made it very clear yesterday that he views the signs of recovery as patchy at best and any recovery was weak.

He then went onto say that there may be scope for further easing – so perhaps we are not quite at the end of this part of the cycle yet.

What does this mean for borrowers? Well, the basic message is that continuing to use a short-term fixed rate strategy will still work.

This paragraph in the statement is arguably the most crucial for borrowers:

“We consider it appropriate to continue to provide substantial monetary policy stimulus to the economy. The OCR could still move modestly lower over the coming quarters. We continue to expect to keep the OCR at or below the current level through until the latter part of 2010.”

There is always the caveat things may change, but at the moment the risk to the short-term fixing strategy is low.

Attention will now turn to the wholesale markets. We have seen swap rates creep up slightly as the market got ahead of itself in anticipating rate rises. However, they have come back five to10 basis points after the announcement.

I would expect these rates to ease back some more and it is conceivable home loan rates could fall marginally on yesterday’s news…

If they don’t fall, one thing is for sure; the Reserve Bank has put a cap on any immediate home loan rate increases.

One of the less reported news items this week was the Prime Minister’s speech about the economy where he lambasted its recent performance.

The speech also included the “six drivers” the government wants to use to address the country’s economic underperformance.

One which property owners need to be wary of has been labelled “a world-class tax system”.

Now this speech was a little fuzzy and didn’t tell readers or listeners much about what the problem with the tax system is or what could change.

However, already there have been comment pieces suggesting the target of such reform will be property investors.

One metropolitan paper ran an editorial saying that changes must be made to stop New Zealanders using foreign funds to borrow up big and then invest in housing.

This is a theme which has been picked up elsewhere.

While the tax system, arguably, may encourage property investing, making changes to the tax system isn’t going to be some magic bullet to solve economic performance or to make houses more affordable.

I’m wary that forces are lining up to attack something which has arguably delivered a lot of wealth to New Zealanders.

Any changes need to be well thought through and discussed. As for property investors, be warned: you may be about to come under attack.

One of the most common questions I get asked is, where are interest rates going? People want to know where rates will be in a year’s time to help them make decisions on what to do now.

Unfortunately, no one can answer that question. It’s a bit like asking what you are going to have for dinner on June 15, next year.

Rates can be highly unpredictable, especially in this period of time where there is much economic uncertainty.

A year ago no one expected interest rates to be as low as they are today; if they did then it would be hard to explain why all these people took out long-term loans.

If they knew where rates were going they wouldn’t have done that and we wouldn’t have had this huge amount of activity in breaking fixed rates.

While we don’t know where rates are going we do a lot of work at mortgagerates.co.nz trying to get a handle on this question.

One of our regular surveys is of economists and their predictions about where interest rates will be in the future.

In the survey we ask the question about the OCR and the floating rate mainly as they are tied together, although the Bank of New Zealand chief economist argued otherwise recently.

The results of our most recent survey show a clear trend, but also show that economists have some quite different views around timing.

The overall trend, and this shouldn’t come as a surprise, is that rates will stay low until some time in 2010, and then start to rise quite quickly.

Looking at this floating rate graph, it shows that we may well see some more cuts to what is on offer.

The cuts are looking at coming in the next quarter or so which may tie in with any spring advertising campaigns from banks. From there we don’t see any movement until early to mid 2010. Then rates rise, and according to predictions, they may rise quickly and strongly.

Indeed there are suggestions that floating rates could get up above the 8% mark within 12 months.

While that seems high, the floating rate has averaged a whopping 9.4% over the past five years – making 8% look nearly cheap!

One of the more fascinating stories for property investors this week has been changes at formerly high-profile “education company” Richmastery.

This story reports on a restructuring where the business is transferred from one company to another and the former company is put into liquidation.

Richmastery is one of those organisations which attracts a fair bit of criticism; Often it is labelled as promoters of “get-rich-quick” schemes and even the word “spruiker” has been attached to it.

No doubt some of the criticism is well-founded. Other bits are tall poppy syndrome, or just competitors taking a free-hit.

One does have to acknowledge though, that over the years Richmastery has helped many people get into property investment and succeed.

What is interesting to observe is that the company is not as prominent as it was during the boom years. Its advertising is rarely seen these days. The millions of email I used to get in my inbox have stopped coming.

Many companies have a life cycle and one wonders whether these “property education” companies only last for one property cycle? I don’t know the answer.

It seems there are a number of contenders starting to emerge who are eyeing up the space once dominated by Richmastery.

Of course the other reason Richmastery may have gone through this corporate restructure and left behind a shell company with no assets and $76,000 in debts could be something to do with one of the last comments in the liquidator’s report.

It says Richmastery and Gilligan Rowe are in a legal battle. None of the details are revealed, but no doubt a scrap between the two principals would be one riveting legal battle.