With interest rates so low and term deposits returning investors an ever-smaller income, how long before we must learn to live with negative interest rates?
The highest New Zealand’s official cash rate (OCR) has ever been this century is 12 years ago when it hit 8.25% in July 2007. It remained at 8.25% for a year and has been sliding ever since, albeit with a couple of blips before resuming its downward slide.
The first blip in the middle of 2010 took the rate up to 3% (from 2.5%) before continuing its slide, and another blip in 2014 took it up to 3.5% (from 2.5%) before resuming its long-term decline.
The OCR currently sits at 1.5%. Economists expect the Reserve Bank to cut another quarter-point tomorrow, dropping the OCR to a record low of 1.25%.
Market expectations are for another quarter-point cut in November, bringing the OCR down to just 1%.
Switzerland, Sweden and Japan already have negative central bank rates, and the Eurozone rate is 0%.
How long before we get to zero?
(Learn more here: NZ Interest Rates Forecast)
Meanwhile, for investors with cash in the bank, long term deposit rates in New Zealand are at 3% while Australian rates are slightly under 2%, with both trending down.
With an estimated US$12.5 trillion worth of global bonds trading at negative interest rates, could negative interest rates be on the horizon for New Zealand investors?
Retail deposit rates in most of Europe are zero or slightly above, and more than half of European government bonds are trading on negative yields.
Swiss, German, Dutch and French 10-year government bonds are all trading on negative yields.
Remember the Greek government-debt crisis? Greece required bailout loans from the IMF from 2010 right through to 2015. By 2017 Greek government debt had hit 318 billion Euros.
Greece was one of four basket case Southern European economies referred to by the acronym PIGS – Portugal, Italy, Greece and Spain.
Just over four years ago Greek 10-year government bonds were trading at a 14.6% yield.
In March 2019, Greece sold 10-year bonds for the first time since before the bailouts and they are currently trading at a yield of just 2.02% 😲
Shockingly, this is only a quarter-point higher than safe haven US 10-year government bonds at 1.78%.
What is an investor to do?
Prudent retirees and those nearing retirement tend to adopt more conservative investments, especially cash deposits. But with low interest rates generating a much lower income to live on, those investors are increasingly looking at the higher yields afforded by stocks and property.
Older investors still remember the 1987 sharemarket crash when many investors lost everything. Small mum & dad investors were also burned and deserted the share market, which languished until the early 2000s. Thirty years on and our economy still bears the scars.
Following the advice of financial planners, many investors moved to the perceived safety of finance companies. We all know how that ended. The GFC hit and many investors lost everything.
Between May 2006 and the end of 2012 there were 67 finance company collapses in New Zealand.
Property is the last safe haven left standing, popular because of its tangible nature, lower volatility and higher yields, especially commercial property. Nothing beats bricks and mortar for peace of mind.
Syndicated property funds that sell ‘units’ and are invested in only one or two commercial properties are common but risky. They tempt investors with high dividends but suffer from a lack of diversification and lack of liquidity.
Secure property funds that are diversified across multiple, well-located commercial properties are proving particularly popular.
Provincia property fund, for example, invests in quality mid-sized commercial properties, investing in growth areas with sound economics.
Provincia is an open-ended PIE fund…
Open-ended means it is diversified across all the properties in the fund, and becomes even more diversified as more properties are added. Investors are not locked into only one or two properties, as is common with syndicates.
As a PIE fund, investors enjoy significant tax benefits.
Investors own tradable shares in the company (Provincia) that owns the properties rather than less-liquid ‘units’ in a syndicate.
Provincia offers investors 6% quarterly dividends and capital growth, which has averaged 33% over the last two year period.
One of the fund’s goals is to remain in solid conservative investments that carry minimum risk, especially considering the current financial climate we are presently facing. Accordingly, the fund invests in New Zealand industrial property.
With low prime industrial vacancy rates, positive rental growth expectations, and record low interest rates, industrial property remains a sought-after asset class among investors.
Provincia property fund is open to wholesale investors only. To find out if you qualify and to receive a copy of the Investment Statement, enquire here »