Article: Property Investment

Interest Rates Lower For Longer And The $3M Portfolio with Frank NewmanInterest Rates Lower For Longer And The $3M Portfolio with Frank Newman

Last week the new governor of the Reserve Bank, Adrian Orr, sent a clear signal to the market that interest rates are going to remain low for quite some time yet. He indicated the official cash rate (OCR) may remain at 1.75% until 2020, pointing to reduced inflationary pressure due to greater business uncertainty and the forecast of slower economic growth.

His comments surprised the market because it extends the low interest environment longer than had been previously projected. The reaction immediately sent the kiwi dollar into a tail-spin downwards ending in a two-year low against the US dollar.

That’s good news for exporters, but bad news for consumers because it makes imported goods more expensive; and that includes pretty much everything, given our reliance on imports. The most obvious increase will be petrol but it will also flow through to higher building costs and increased retail prices generally.

This comes at a time when business confidence is on the decline. Although the economy is still expected to grow, most are now expecting annual growth to be around 2.5% rather than 3%. Should the economy slow even further it is not inconceivable that the Reserve Bank may well lower the OCR a notch.

Following the announcement a statement by two Kiwibank economists described the kiwi (dollar) as an “endangered species”, saying they expected the dollar to fall to 63 cents against the US dollar within the next year - from 69 cents before the Reserve Bank announcement. They also said this pointed towards lower mortgage interest rates, and the Bank backed that up by lowering its one-year rate to a new low of 3.99%.

At the longer-end of the interest rate market Westpac has reduced its five-year fixed rate to 4.99% and the ASB has cut its four-year rate to 5.35%.

The Governor’s view that the economy is slowing is consistent with the view of others. The ANZ business outlook survey suggests business confidence is at its lowest level for nine years.

There is no question some of the heat has gone out of the property market, particularly in the hotspot areas, and one gets a sense that properties are now taking longer to sell, which suggests there are fewer buyers in the market.

The Reserve Bank warning came just days after Treasury said its Budget forecasts would not be achieved if business confidence continued to slide and the housing market cools further. That will be a worry to a government that has spent up large and agreed to substantial wage increases for a number of state sector workers. Although they will no doubt continue their toothy smiles and positive political spin, it is now highly likely that next year’s Budget will downgrade revenue forecasts and projections.

The problem the Labour government has is that for the many years it was in opposition it vilified wealth creators for political gain – only to find that they now depend on them for their tax revenues! The challenge for the government is to revive business confidence, and that will not be easy given they only received 37% of the 2017 election vote, and that they are now in bed with the anti-business Greens - a party that gathered little over 6%.

And now to a ‘can-do’ success story. A few weeks back the NZ Herald reported on a 21 year old who had accumulated a portfolio of 11 properties worth $3 million that was generating $60,000 a year in net cash flow. His net equity was about $1m.

So how did he do it?

• He focused on accumulating money from a young age, having been inspired by
the success of other property investors.

• He understood the power of leverage and how it can be used to create substantial
wealth.

• He realised the power of compounding returns and the sooner he could get onto
the property ladder the better off he would be in the long term.

• He had some help from his parents who toped up his savings to give him enough
for a deposit on his first house, and they guaranteed the bank loan.

• He adopted a strategy of buying below market rates, renovating to add value, and
using the increased equity as collateral to fund new purchases.

• He took a buy and hold approach.

• He put in the hard-yards, working on renovations and spending many hours
learning as much as he could about property investment, networking, and looking
for deals.

While not everyone will have parents with the financial means to top up the deposit and act as guarantor, it does show what can be achieved if someone is highly motivated to succeed.

Frank Newman is the principal of Newman Property Consultancy. He is the author of numerous books on investment matters. For questions or comment about this article contact .(JavaScript must be enabled to view this email address)


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