Interest rates are often talked about in capital market circles as being a significant indicator of the direction of a country’s economic policy.
However, economists love to create a word fest filled with jargon and non-committal sentences that do not give the average Jane and Joe any indication of what’s really going on.
This article is about demystifying interest rates and what it actually means for a SMART property investor.
The first and most important thing to understand is that when a central bank (e.g. the Reserve Bank of Australia or The Reserve Bank of New Zealand) reduces interest rates, its a strong signal that the central bank is looking to stimulate the economy.
Falling interest rates make borrowing attractive. More borrowing = more money in the system = more spending = more “cashflow” all around = more economic activity = the party in parliament looks like they’re doing a great job of growing the economy.
Most economists will argue with the simplicity with which I’ve written the above sentence and try to obfuscate the “real” goings on but the fact remains – falling interest rates = more money being pumped into the system.
They call it quantitative easing. Could there be a more ambiguous term to describe “printing more money”?
Wait… it gets more technical…
It is for this reason, every statement that mentions interest rates, is quickly followed up by a paragraph or two that talk about inflation.
Because too much free money in the system can wreak havoc from an inflation point of view if not kept in check.
So how is it kept in check? By being selective about who or where this free money lands.
To help explain this, let me boil it down like so:
The rich, the poor and the middle-class. Who do you think benefits most from this free flow of money?
The poor? The middle class or the rich?
If you choose either the Poor or the Middle Class then you’ve been infected by the same virus of mis-information that 99% of the population has been infected with for several decades now.
If you’re not sure what I’m talking about then perhaps you should lookup the concept of ideological subversion – it will either push you more toward ignorance or open your eyes to what’s really been going on in society for the last 4 decades.
Back when I was a day-trader, I used to spend hours watching the news on Bloomberg and listen to BOE Governor Carney making a hawkish speech here… ECB heckler Draghi going Dovish there and then, the biggest anomaly in the history of US Fed. Res. Janet Yellen – not knowing what the hell she was talking about. I used to scratch my head and wonder why these highly educated people can’t speak in English. Hawkish… dovish… well, how about just plain ENGLISH… For F… Sake…
They love playing these games with Jane and Joe. They want Jane and Joe to remain stupid, mis-informed and they make these press conferences so technical and sophisticated in terms of a word fest, that most Janes and Joes will feel stupid asking “what do you mean by hawkish”…
I once got into a bit of a tussle with a reporter from Bloomberg about how they represented market movements of a few basis points in tenths of a percentage point. E.g. Instead of saying the market moved by 0.2%, they like to say, the market moved in the dovish direction by two tenths of one percent… FFFFFFFFFFFFFF…..K really?
Guys… as a SMART Property Investor, you’ve got to equip yourself with the facts so you can cut through all this noise and focus on information that matters to you. So when interest rates are falling, as a property investor, these are the main points of impact that you should care about:
Your current lending – use this opportunity to re-negotiate your lending rates, terms and limits with the lender. Ask them point blank, without any dilly-dally, “how are you going to transfer some of this interest rate reduction into my portfolio” – don’t be afraid of driving a hard bargain with these bankers. Remember, even 10 basis points or 0.10% reduction can have an impact on your portfolio.
Imagine your portfolio is worth $10mil with 80% LVR on interest only terms. 0.1% = $8,000 per year.
The Market Dynamics – stimulus or Quantitative Easing (QE) or whatever fancy way you want to say it, reduction of interest rates is meant to give middle income people an impression that the Prime Minister is doing this to help pull people through an economic slowdown – BULLSHIT.
QE was never designed for the benefit of the poor or the middle income folks. It was always, and will always be the tool used by the rich to get richer.
So, a drop in interest rates will create a short term spike in borrowing, home buying, listings in the market – but you’ve got to cut through all this and stick to your strategy that you would have learnt in the SMART Portfolio Builder series – do not play into the hands of the central bankers.
Your Buying Power – Theoretically, a fall in interest rates is supposed to increase your buying power. How? Well, simply due to the fact that there’s more money in the system, things should get cheaper, your borrowing should get cheaper, your money should go farther. A drop in interest rates don’t always come with a relaxed IBM (Income to Borrowings Multiplier).
However, if you understand the art of deal making and know the HUSTLE, you’ll use this opportunity to get a better lending solution … wink wink… think second tier… non-bank money. Ditch the big 4 – Their IRRR (Internal Risk, Reward, Regulation ratio) is just unbelievably dodgy and they are nobody’s friend. Support the smaller banks. They are hungrier and can get you more mileage for your money.
If you’ve got enough liquidity to start building a property portfolio then be sure to pay attention to the lesson about Negotiating because in a down market (interest rates don’t fall in a rising market so the contrary is what applies here), if you want to secure properties beyond just the 1-7% standard discounting and 5-12% standard deviation from the rateable valuations, then you’ve got to know how to approach each deal on its own merits.
If your liquidity is tight, then don’t wait for the perfect day when you would have saved up $200,000 and then get going with a portfolio strategy. Get started with small scale developments or cosmetic renovations – use the Options strategy we teach and create quick cash. Then pump that cash into the portfolio strategy and just focus on speed & scale. Don’t stop at just one or two or ten. Aim higher Jane and Joe. Think in the hundreds. The money is there in the system. Banks will happily give it to you…if you only know how to operate at that level.
Before I finish… can you think of how the Australian economy grew consistently over 27 years without a single down year? Look at this chart:
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