Saturday, May 13, 2017

Frank Newman: Interest rates and MP houses

As expected, last week Reserve Bank Governor Graeme left the official cash rate (OCR) unchanged at 1.75%. What was unexpected was the tone of the comments made in the Monetary Policy Statement that went with it.

That surprise was evident in the reaction of the foreign exchange  market where the Kiwi dollar fell a cent against the Australian and US currencies. That reaction was because the "market" had been expecting interest rates to rise faster than the Governor is now forecasting.

The Bank's outlook for interest rates now remains unchanged from February. Many had expected the Bank to bring forward its timing for interest rates increases to curb rising inflation, but the Bank has returned to the view that wage inflation is not likely to appear in the near future and inflation generally is likely to be stable. It also made comment that the economy had not been as strong in the last half of 2016 as forecast, despite the surging building industry.

The Reserve Bank will also be mindful that interest rates have risen slightly, even without the Bank increasing the OCR. Essentially the banks are doing what the Reserve Bank may have done anyway.

So, it's all steady as she goes as far as the Reserve Bank is concerned.

On the housing market Graeme Wheeler said he was pleased to see the Auckland market cooling,  saying "over the last eight months they've actually fallen slightly." There is now clear evidence that the boom is over, although demand remains strong. The fact that the market is coming off the boil will certainly take the fizz out of property prices and may well spill over to the provinces. Most are expecting the residential property market to be stable rather than spectacularly good or bad.

Mr Wheeler also indicated that some banks no longer have the capacity to take on more overseas funding and will start competing for local funds in order to satisfy the demand for finance. That is already evident in the six monthly deposit rate increasing 0.2% in the last year. Over the same time the two year mortgage rate is up by about the same margin.

That will be welcomed by savers, but will in itself place upward pressure on mortgage rates. How intense the competition becomes for savings will be a major factor in how much homeowners have to pay on their mortgages.

On a lighter note, the most recent Register of Interest disclosures from MPs reveal some facts about MPs and property ownership.  Of the 121 MPs, five do not own their own home. That's a little surprising given an MP’s salary and the generosity of their superannuation scheme. Of the 116 MPs that do own property, 53 own three or more. In total MPs own 302 properties.

Given the housing crisis debate, multiple property ownership is hardly something MPs are likely to promote in their election pamphlets, and true to form some MPs said they did not own property because they could not afford it and home ownership for them was a "pipedream".

Coming from a high income earning MP, one can only conclude they are shocking managers of their own money, which does not inspire a lot of confidence when they aspire to control billions of dollars of our money! What is evident in the make up of the House of Representatives is how few appear to be financially successful.

One MP who is prepared to offer some financial advice is National's Chester Burrows, who owns two properties. His gems of wisdom for would be property owners are:
  • Get on the ladder early and slightly over-extend beyond your comfort level. Don't expect a mansion.
  • Have friends with Sky or watch the rugby at the pub.  (Stay away from pubs totally is also a good tip.)
  • Drive a five to ten-year-old car that will start every time but won't lose thousands of dollars as soon as you drive out of the yard.
  • Expect to limit your lifestyle; cut your own lunch, eat at home or go for picnics.
  • Take holidays within New Zealand and even just the wider region for five years and stay in motorcamps not hotels.
  • Pay lump sums off your mortgage as soon as possible.
  • Don't over capitalise on bells and whistles in the house, make low cost but high quality renovations. (I am not sure how one does high quality renovations at a low cost but the idea is certainly a good one.)
That's all good frugal sense. There are of course a few more things that one could add to the list like: setting savings goals, get into the habit of saving, and not wasting money on fags and booze!

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