The Reserve Bank Lowers the OCR

Posted 19 Aug

by Nick Gentle on
Article appears under: Mortgages, About Property Investment,

The Reserve Bank surprised us all last week by finally acknowledging that the economy is operating at a snail's pace and lowered the official cash rate by 0.25%. Banks have quickly moved to lower rates with more to come. 

I am not qualified as an economist or financial advisor, and have no political training - I tend to distrust all politicians - so I have as good a chance of being correct as anyone.

Here are my thoughts on what this means.

1. Will property prices start to rise?

Not for a while, the news for the next 6 months may look very similar to the previous 6. For reference, the OCR was quickly lowered during the GFC, after which it took a couple of years for prices to rise in Auckland and a couple more for the rest of the country to follow suit.

I've been a broken record saying this is a buyers market, and we have 1-2 years, so here it is again; this is a buyers market, and we have 1-2 years.

When prices do rise, look for the pent-up inflation (currency devaluation) to hit in a rush. 

2. Bad news everywhere all at once

The economy is in the doldrums and turning it around is like maneuvering an iceberg... it will happen slowly. Meanwhile, folks who report on news have daily deadlines.

Those two timelines don't mirror up so you can probably just assume the news will be bad on a daily basis and check back in 6 months. If you wait for the news to be positive across the board to get on the boat, you will have already missed it. 

3. There are still some inflation gremlins out there...

The price of electricity is a serious concern (I dislike privatization of core infrastructure because asset owners aren't motivated to increase supply) and is starting to impact businesses and jobs.

4. ... but the state of the economy will largely drown it out

Look, any time you spend money it is a probably an inflationary activity, but the economic mood is sufficiently bad that few businesses are going to put their prices up If the price of electricity stays high for months and months AND consumer demand allows it, we might see some price rises here and there, but across the board? I doubt it, demand will drop first. 

5. Lowering interest rates weakens the NZD, won't that cause inflation again?

In isolation a lower NZD is inflationary because our imports cost more, but demand is low so it will be hard for businesses to pass those costs on. For example, the NZD cost to import petrol would increase in isolation if global prices held, however, there is a global demand slump and kiwis are experiencing lower prices at the pump.

6. What will happen to interest rates from here?

I believe the RBNZ should have cut two months ago, if not earlier, so the bank is late to the party (again) and has more to do. Further cuts steadily incoming.

7. Should I run out and buy property?

Cashflow is king, never more than during a flat or down market, because it can be a long grind. Stick to your criteria. If you are not sure what your criteria should be, email me and I will help you. Do not, I repeat do not, buy something that projects to cost you a lot of money to hold at time of purchase (especially if there is no upside) in the hope of passive gains in the future. Leverage can accentuate both wealth and pain. You can do better and if you're lost as to how, reply to this email.

8. What about high yield properties in small towns?

Be careful of vacancy risk. I invested through the GFC, and the same trend happened; people moved overseas or back with family. Smaller towns can empty out, leading to long vacancies. Larger centers, particularly those with a tertiary institution, are safer in that regard. Also, rates and insurance can really eat into your profits with cheaper properties. In my course there is a lesson that has a case study explaining this.

9. What is buyer demand like?

Here at iFind HQ I can report an increase in buyers engaging us to search for a property. This is across all locations, and reflects recent interest rate stabilization and the government unwinding some of the law changes the previous regime brought in. 

I am not sure if that is a reflection of the wider market, if it was it would still take months to show up in any statistics. Enjoy the quiet time. 

10. What am I doing?

Right now I'm positioning myself to buy. In the last week I have had calls with my accountant and broker and made plans for the next 18 months. I don't know what approach I will take to this market and since I have been at this for a while it will be different to new investors. For example, I am perfectly happy ticking along renovating properties to sell, because my portfolio for the long term is already in place. If I was starting from scratch I would only be looking for buy-and-hold deals.

We will see what opportunities come up :-)

11. What are some things that you can do?

I shared these ideas in an article in June so if it appears that I am repeating myself, it is because I am repeating myself. 

From someone who invested through the GFC and got a bit wrong, as well as a bit right, and has had many years to reflect and grow, here are some tips:

  • Be ready to buy. There will be good deals and more active buyers, so you will want to be in a position to pounce. So go talk with that advisor, meet with an accountant, and set your mindset that you are in the market. 
  • Join the local property investors association and start to chat with people each month about what they are doing. You will pick up what to be optimistic about and wary of from experienced people.
  • Don't rush out and get stuck on an average-to-bad deal. Your likely biggest risk in this market is opportunity cost of having to watch from the sidelines.
  • Have a goal you are working towards, each purchase has to contribute to that goal. There will be deals that work for others but not you and that's OK.
  • Know that the news will be bad about the economy for a while yet. Mentally allow for it in advance. 
  • Understand what it will take from the bank's perspective to build a portfolio. 
  • Work with a coach, mentor, buyers agent or some other expert to make sure you don't settle for mediocre and watch the market leave you behind. 
Nick Gentle

Nick Gentle
Business Owner & Operations Manager
nick@ifindproperty.co.nz
027 358 3855

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