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.

What are your forecasts on the housing market: Time to buy sold or hold?

With all the contradictory commentary out there, I actually suspect that the average person who is either in the market to buy or sell, can give us the pulse of the market better than any other source.

If you are in the market to either:

1.      Buy your first home,

2.      Sell and buy your next home, or

3.      Buy or sell but are actually on hold now for some reason…

Tell us why?

Click on this link here to go to our Facebook page, and enter our discussion on whether or not now is the time to buy, sell or hold.

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

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 with 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.

The pros and cons of selling privately

I often come across people who quite successfully purchase via private treaty and bypass the use of a real estate agent altogether. There are good reasons to try and go down the private sale path, but also a few things to watch out for…

The Pros:

I can never understand why borrowers approach their banks directly to arrange mortgage finance – it does not save them anything (in fact it only really saves the banks money!). With selling your property privately however, I can see the logic. Assuming you are operating outside of an agency agreement and the buyer was not introduced directly or indirectly through an agent, you could find the buyer and do the business direct.  Apart from saving commission, here are some other reasons:

1)      Speed and simplicity – if you have a buyer and the price is right – no need to market, just sign up an agreement! This is especially common when it is a family transaction.

2)      You may have the #8 do-it-yourself mentality. It can be kind of interesting to have a go at marketing and negotiating on your own property.

3)      If you do not want anyone to know that your property is for sale, selling privately will delay this information getting to your neighbors.

The Cons:

1)      Get a valuation report right away - From a buyer’s point of view, their bank will require them to get this for their finance. It will also help you to establish, in the absence of exposure to the market, what the property is worth independently.  

2)      Once a market value is agreed upon, the commission that you would normally pay to an agent is usually split 50-50 with the purchaser in the situations that I have seen – so assuming you get the same price as an agent would, you only really save 50% of the total commission if you are doing it like this. Remember that the purchaser will be looking for a deal, as they know that you are not paying a commission.

3)      Solicitor fees –it is advisable to get a lawyer involved as soon as you possibly can to begin the process of drafting a sale and purchase contract. As they are involved more in these transactions, the fees can sometimes add up.

4)      Buyers generally do not like negotiating directly with the vendor on private sales – selling/buying a property can be an extremely emotionally charged activity, and even more so if there is no third party involved.

5)      You’ll save the commission, but unless you have reached the entire addressable market, there is no certainty that the price that you have agreed upon is the best price possible.

So would I sell privately? No. The reason is that I have seen numerous real estate agents in the past, sell via another agent when they go to sell themselves. If agents use agents to sell, then this is a good enough reason for me to use one also – I apply myself 100% to my job and I would consider myself an expert in my field – What could I know about selling a property that an agent does not already know? Not every agent is a good fit for everyone, so choose them carefully and a recommendation from someone you trust is the most valuable. If you want to sell through an agent, let me know, as I can potentially put you in contact with one in your area who I know is good.

Get your ducks in a row…

One aspect of purchasing a house that is often left to the last moment is the obtaining of insurance for your house. All lenders require your house to be fully insured (usually for full replacement value), if you are using mortgage finance to fund your purchase.  Until fairly recently, obtaining house insurance was automatic but this is changing. Insurance companies are asking more questions. If you are purchasing an older house, say pre 1935, they may ask about the condition of the wiring, footings, plumbing etc. If they are unhappy about this they may require it to be updated or they may decline to insure your property altogether. If the property has been subdivided into flats they may well ask whether this been approved by the local council. Then there is the issue of leaky buildings.  In most cases obtaining house insurance is straight forward but we advise that it should be arranged well before you even go unconditional on a property. If you are looking to bid at auction, especially for an older style villa etc, it would be a wise exercise to talk to an insurer and/or obtain a questionnaire from them to complete to effectively get ‘pre-approved’ for your house insurance before going unconditional. If you need help in this area, please let us know.

Official Cash Rate – has the lever been pulled to early??

A few weeks back, the official cash rate was increased by 25 points. This was the first increase in a while, and whilst there was a wee stand-off with the banks, they have finally moved to increase the interest rates (floating and 1 yr rates).

My gut feel is that the reserve bank governor increased the cash rate prematurely. I think that some of the data, like the low unemployment rate for example, is being read out of context. I know a few clients of mine who, whilst they still have their job, have taken reduced pay to help out their employers – people are working really hard out there, but income has actually reduced. The unemployment rate just shows you who is and is not working – it does not show the average household net income (a metric which would be far more useful). This recession was a household led recession – if that is the case, it is going to be a household led recovery. Putting up one of the biggest costs right now may prolong the recession even further.

One of the positives out of what has happened with interest rates in the last two years however, is that more and more borrowers are on floating interest rates (like me) as this has been one of the cheapest options in the last couple of years. This makes the household sector much more vulnerable/responsive to adjustments in the OCR. This is in contrast to 3 yrs ago when the bulk of borrowers were fixed and totally unresponsive to the decreases of the OCR. This will likely stop house prices (and the economy) from getting too overheated again anytime quickly (assuming long term funding stays at least expensive as it is now).I certainly don’t enjoy being smacked around by the visible hand of the state, but for the common good of all perhaps it’s okay?

 Talk of rate rise sooner, due to low un-employment rate:

I should have known better than to comment on my previous blog, that the rates would stay low for a long time yet – Next thing I know, really positive news comes out of the employment sector (click here for more). The assumption is, that due to the economy being at its capacity in terms of available human capital, there will be pressure on wages, which will in turn add to pressure on prices (not to mention the fact that an increase in GST will be an automatic pressure to prices also). In order to slow down any wage-price inflation, the reserve bank can increase the official cash rate, which is a direct brake on economic growth. I like to use the analogy of chemotherapy – it’s a nasty treatment that treats the entire economy, not just its intended target of inflation.

I would still be bullish enough (but I’m slightly more of a bear as of last week) to suggest the average annualized rate over the next 2 years on a floating home loan account will be less than the current 2 yr rate. The floating rate will rise however, but perhaps slowly by 0.25% at a time – maybe we will see a floating home loan interest rate of 6.75% by early next year, and perhaps around 7.25% in a year’s time? Who knows!? If you are on a floating home loan, apart from seeking advice for your specific situation, the only other thing I would suggest is that you begin to pay off your variable rate home loan at an amount equivalent to a 7.5% interest anyway, right now. You will absorb the interest rate shock later on by doing this and save money in the interim.

How Embarrassing!! Local lender gets a slap on the wrist….

A wee while ago, back in 2008, right before the property market was just beginning to ‘correct’ itself (I love the term ‘correction’, it’s like the property market said ‘oops, my bad, sorry…’) interest rates were rather high - you could pick up a 5 yr fixed mortgage from for example or around 9.3 -9.4%.

At the same time there was some advertising (mostly by BNZ and Kiwibank) promoting these fixed rates (which at the time seemed quite attractive compared to other lenders). Many borrowers decided to fix with these lender on these terms (again, as they were cheap compared to other lenders). And what happened? Rates tumbled, borrowers wanted out of fixed term contracts in favor of floating or short term fixed rates that were in the 5’s only around 6 months later – huge break fees resulted.

Now it just so happens, that some of the lenders that do not use mortgage advisers charged the highest break fees (All lenders use rather complicated formulae to determine their break fees, but some lenders use a different calculation which is based on their cost of funds and not the advertised rate for their funds). “ Kiwibank was found to be the worst offender, calculating break fees with a formula that breached of the Credit Contracts and Consumer Finance Act (CCCF Act).” Read more here. Due to fact that these lenders do not use mortgage advisers, people who used these banks may not have received advice around what terms they should have fixed for – perhaps they simply chose the term based on comparison with other lenders (and not their needs).

It is good to see the commerce commission acting on the voices of the consumers in this matter. If you were charged a massive break fee from either HSBC or Kiwibank during this period, I would suggest that you approach your lender to see if there may be some compensation owing to you. Also, I would be keen to hear of your stories also relating to break fees from these lenders – please email me.

This really highlights the need to have good advice. If you would like to read more commentary on this type of thing, my competition has written a fantastic blog on this – click here for more (just don’t talk with them if you need a mortgage!)

We’ve moved!

I almost forgot - we moved a couple of weeks ago down the road, to level 3/202 Ponsonby Rd. Please come and visit - it is the top floor of the White Cross building on the corner of Ponsonby Rd and Franklin Rd. Apart from being in decaffeinated zone of Ponsonby Rd., it’s a fantastic location with more parking and most importantly, air conditioning! Click here for map.

Thanks for reading my blog – remember that the bulk of this article is opinion and is not intended to be specific advice for your situation.

Home loan approvals down, property and wage inflation is flat – what about interest rates?

Approvals at banks are down 30% for the first quarter of this year compared to the same time last year. Auckland city fringe being the exception, property prices are going nowhere fast and wage/salary growth rates are relatively flat also. This will no doubt influence our interest rates in the coming months and years.

http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=10638634 According to this article, ‘experts’ say that the main reason why home loan approvals are down is primarily due to a decrease in property turnover:

I suspect that another may be that of the fact that the lending criteria with the lenders are incredibly difficult – still. I should clarify however that not all banks are the same, and some banks have actually reported higher or stable approval ratios than others.

One thing is for sure, banks still in my opinion have very attractive rates at the moment, especially with floating rates. At the same time however they do not appear to have significant amounts of money to throw around like they used to. In any given Herald, the number of advertisements offering great term deposit rates far outweighs the advertisements offering cheap mortgage rates. There are other things afoot also – one major bank has recently decided to charge fees (all say that they ‘may’ but this one actually ‘is’). An application fee of up to $500, no contribution towards legal fees and no discounting of the interest rates is currently being enforced by this lender. Whilst there are no signs that other lenders are following suit, it is likely only a matter of time. Is this another sign that the banks are not entirely keen to lend much money at the moment? The banking environment, along with changes in tax laws, along with prolonged worldwide stagnant economic growth; all indicate to me that we are well and truly not out of the woods yet.

Wrapping it all up, what does it all mean for 2010?

1.      Lending criteria with banks in general may continue to be tough (having said that, there does appear to be some easing of interpretation with some of the lenders policies)

2.      House prices will not likely break many records this year (except perhaps for some city fringe areas like Ponsonby and Grey Lynn etc)

3.      Floating interest rates will be cheap for quite some time (some say mid this year it will increase, I would be bullish enough to suggest this time next year before there are any significant increases and by significant, perhaps 1% or so)

4.      It will likely be another 2 years before we are “out of the woods” – when talk of increasing economic activity appear and talk of threat of inflationary pressures start to occur, this is the time that floating interest rates and the property market may start to rise again consistently.

New Regulation for Financial Advisers

The Financial Advisers Act is set to be enforced by the end of this year – this act will require those of us giving financial advice and selling products to operate to specific criteria. All advisers will have to be ‘registered’, which mean that they will be overseen by the Registrar of Financial Services. Those of us (and our firm comes under this) will be ‘authorised’ as well as registered due to fact we offer a far more complex/comprehensive service to our clients – the difference being that we will be assessed to ensure we meet certain standards of competence and knowledge (not just now, but every year we will have to achieve education credits to make sure we are up to date).

The implementation of this Act will have a huge impact on the industry when it comes to obtaining mortgages or insurance, or obtaining investment advice (note we do not offer investment advice):

1.      Banks will be registered but it is unclear (to me anyway) if they will be authorised. This means that for advice on what is best for clients needs, people will only really be able to obtain this through advisers like myself or through appointed advisers from the bank.

2.      Many advisers may leave the industry. I don’t know what the average age of an insurance adviser is, but I suspect it is pretty old considering most of the conferences and seminars I go to, it’s like going to dinner at the RSA! (no disrespect intended as I occasionally visit the odd RSA myself). With this regulation coming into effect, some may view this as a great time to retire.

3.      The quality of advice and service to clients will increase. This, combined to the fact that we are now more accountable for the work that we do, means that clients should be dealt with better in the hands of advisers, than in the hands of banks.

Whether or not there is a mastermind behind this one or not, there are multiple factors which will influence NZ borrowers towards choosing a floating rate home loan vs fixed.

Currently you can find a floating home loan for 5.75% or even less in some cases. Compare this to the ever popular 2 yr fixed rate which is currently around 6.75% (or as high as 8.60% for a 5 yr). If all the indicators point to a low floating rate home loan for the next 2 yrs at least, why not consider letting your home loan float along instead of fixing it? Here’s an example: If (and there is always an if!) the floating stays around 5.75% for the next year at the very least, it would actually have to rise to 7.75% in 1 yrs time and stay there for another year, in order to make it the same cost as a 2 yr fixed rate. If you understand the simple mathematics behind that calculation, then you will see very quickly how ridiculous fixing for longer than 2 yrs at the moment is. Now this is just focussing on rates, which I always say is a big ’no-no’ - with floating rate home loans especially, there is much more to it than the rate:

1. there is no break fee penalities as  you are not repaying a fixed rate
2. there is no problem in converting it to a fixed rate later on
3. they are usually very easy to make wee lump sum payments on
4. there are also “capped rates” with some lenders, where the loan is floating, but capped at a level for safety
5. lenders may also be introduing true “offset” mortgage account facilities soon

If it was me, I would float, but I would also ‘overpay’ my mortgage slightly so that when the rates rise again, I can increase my loan term to absorb that shock - please read previous blog regarding “The Interest Rate Shock Absorber” for more info on this.

House Prices Back Up Again

According to QV Valuations, house prices are climbing back towards last year’s levels, after four months of increasing sales values. The national average sale price for August (New Zealand wide) was $385,426, only 2.8% below the same period last year. The main reason for this recovery is the shortage of stock and the demand for properties which is reasonably good. Again QV Valuations note that this is a surge rather than start of a boom. The Auckland market is recovering as well - the average sale price for August was $564,319, only 1.8% off the corresponding figure from August last year. (source:James Lockie at General Finance Limited)

Interest Rates

The Governor of the Reserve Bank announced no change yesterday to the Official Cash Rate (OCR). This was not unexpected. Wholesale interest rates are at an historic low, so any further easing is most unlikely. The only real reason to lower interest rates further, would be if our currency appreciates too much. Our currency has been appreciating against all the other main currencies but according to the Reserve Bank, it is still at manageable levels. The comments made by the Reserve Bank yesterday are revealing and informative. They are saying the decline in economic activity is coming to an end and a patchy recovery is underway. They note however that the medium term outlook remains weak. Inflation is not a worry – this is positive for the lower interest rate regime. They expect short term interest rates (especially floating) to remain at their current levels for at least a year. This is a more positive outlook than six or twelve months ago. (source: James Lockie at General Finance Limited)

Do you know anyone who is house-hunting at the moment?

We are finding there there are plenty of people looking to buy but are being told ‘no’ from there bank for multiple reasons. As we deal with multiple lenders, we are often able to turn a ‘no’ in a ‘yes’. Our business success is based on people referring other people to us - if you know of anyone who could benefit from our services, please click here: http://ungaro.co.nz/testimonials/referrals/

Thanks for reading!