On Wednesday a property investor asked others, “What plans do you have in place if interest rates suddenly go up to 7-10%?” Curiously, earlier that day…
The Reserve Bank of New Zealand (RBNZ) surprised the market with its decision to hold the official cash rate (OCR) at 1.0%. Most economists were expecting a cut to 0.75%.
The Reserve Bank’s monetary policy committee decided there had been no major change in the economic outlook since the 0.5% cut in August. But it said it was monitoring economic developments and further monetary stimulus (i.e. more cuts) would be added if needed.
It said employment remained around its maximum sustainable level and, while inflation remained below the 2% target mid-point, it was still within the bank’s target range.
Interest rates to remain low for a prolonged period
RBNZ governor Adrian Orr said interest rates would have to remain low for a prolonged period to ensure inflation met the mid-point of the bank’s 1-3% range, as well as ensuring employment remained around its maximum sustainable level.
“We are committed to achieving our inflation and employment objectives,” Orr said.
Interest rates move slowly
When it comes to interest rates, including mortgage interest rates, big changes do not happen “suddenly”, they happen incrementally over a period of time.
For mortgage interest rates to “suddenly go up to 7-10%” we would need conditions quite different to what we have, and what is expected over the coming years.
It would need an almighty booming economy with a huge bubble developing, and a Reserve Bank desperately trying to cool things down with OCR increases before the bubble bursts.
Instead, most New Zealand economists expect the current slowdown to return to gradual growth in 2020. Nobody is expecting it to be a ‘boom’. Some pundits overseas are even predicting the very opposite, a recession, in which case interest rates will go even lower and stay lower for longer.
So quite why a property investor would expect interest rates to suddenly go ups to 7-10% is quite beyond me. I’ll give him the benefit of the doubt and put it down to prudent contingency planning.
Other investors were not quite so circumspect though. Here’s a selection of their feedback…
“If they hit that interest rate mark, I’d say there will be a complete banking collapse with mortgagee sale after mortgagee sale. Rents through the roof and general chaos within property and economic sectors.”
“I think the word ‘suddenly’ is the key to the question. If interest rates start to rise I think it would be reasonable to expect it to take a couple of years to get that high. Landlords would put rents up every 6 months as the rate went up.”
“The economy is barely keeping afloat, what on Earth makes you think interest would go anywhere near that high in the foreseeable future? You should be more concerned what happens if interest rate goes negative.”
“The biggest increase we’ve seen in the last 20 years was 2004-2006 when interest rates increased from 6% to 9%. This also coincided with an enormous spike in NZ house prices.”
“Back in the late 1980s interest rates were 18% to 24% (I know, I was there, paying) but house prices were doubling in around four years. It all worked out.”
“Thanks to retirement savings schemes such as Kiwisaver there is so much money floating around internationally that it is extremely unlikely the demand for money exceeds the supply of money. So very little chance rates will go up much.”
“I think what many people don’t realise is that interest rates rise due to factors like rising inflation. Rising inflation means rising house prices, rents and salary. Yes you will actually get more raises. So in the end it all balances out. Nothing in economy happens in a vacuum, everything is linked.”
The funniest comment, though, came from an investor who reported his plan for interest rates suddenly going up to 7-10% was:
“Same plan I’ve got for the sky falling in.”
Term deposit rates getting lower by the day
Interest rates on 12-month term deposits are mostly sitting at 2.6% right now, and on an downwards trend.
It’s not good for retirees whose only source of income is the pension and interest income. Let’s assume someone in that position has a $1,000,000 term deposit at 2.6% p.a. That puts them on a 17.5% income tax rate. Their after-tax income from that whopping $1,000,000 term deposit is a pitiful $21,450 p.a.
Is it any wonder people are chasing higher-yield investments? Our own Provincia Property Fund pays quarterly dividends of 6% p.a. and has enjoyed 35% capital growth since the beginning of the financial year. If you’d like to find out more, come along to a free investor information evening. Click here for more info »
Listed property funds overpriced
This search higher yields has driven up the price of listed property funds, and conversely driven their dividend yields down, to the extent that some are now overpriced. Check out this list…
Precinct Properties (PCT)
Gross Dividend Yield: 3.75%
Share price growth 1-Apr to 14-Nov 2019: 14%
Goodman Property Trust (GMT)
Gross Dividend Yield: 3.83%
Unit price growth 1-Apr to 14-Nov 2019: 21%
Property For Industry (PFI)
Gross Dividend Yield: 4.25%
Share price growth 1-Apr to 14-Nov 2019: 20%
Stride Property Group (SPG)
Gross Dividend Yield: 5.53%
Share price growth 1-Apr to 14-Nov 2019: 9%
Kiwi Property Group (KPG)
Gross Dividend Yield: 5.77%
Share price growth 1-Apr to 14-Nov 2019: 4%
It makes Provincia look really good…
Provincia Property Fund
Gross Dividend Yield: 6.0%
Share price growth 1-Apr to 14-Nov 2019: 35%
(If you’d like a slice of the Provincia action, come along to a free investor information evening. More info here.)
Commercial property yields go crazy low
Against this backdrop of low interest rates that are here to stay, yields on commercial property are being compressed as investors climb in.
This is especially evident in the easily accessible price bracket of sub $2 million where investors are competing with owner/occupiers who are buying premises rather than leasing.
Some of the yields such properties are selling at are crazy low. Check out these examples…
Bob Dey reported today that, “Colliers’ auction of 2 Rosedale warehouses on the North Shore yesterday attracted a large number of bidders and potential investors seeking better returns than a bank deposit. The strong interest pushed the price/m² up … and compressed the yields – just under 3.5% for one & 3.7% for the other.”
One unit had 5 years to run on its lease, while the other one had just over a year to go.
Today, CBRE also reported 4 recent sales at crazy low yields…
- 3025 Great North Road, New Lynn (retail) sold for $1.24 million at a yield of 3.4%
- 287 Mt Eden Road, Mt Eden (mixed use villa with 4 tenants) sold for $3.9 million at a yield of 4.2%
- Unit 6, 252 Oteha Valley Road, Albany (retail) sold for $1.045 million at a yield of 4.4%
- 28 Norwich Street, Eden Terrace (mixed use, development) sold for $2.2 million at a yield of 4.5%
If you’re tempted to put your money into a commercial investment property like those, may I suggest you instead consider our Provincia Property Fund. It will pay you a quarterly dividend of 6% p.a. and you’ll enjoy tax-free capital gains too (+35% YTD). As a PIE fund, it’s also incredibly tax efficient too. Click here for our free investor information evening dates.