All eyes on the Fed this month

There is a famous saying in economics that goes “In economics, things take longer to happen than you think they will, and then they happen faster than you thought they could.” Rudi Dornbusch is famous for saying this. 

This week is another case in point. Back in January 2016, WTI oil touched $29.93 a barrel, its lowest since December 2003. Just this week, after all the naysayers said it wouldn’t happen, OPEC has agreed to production cuts. This promptly pushed oil prices above $50 a barrel.

In the space of nearly 12 months, the price of oil has moved 60%.  And it looks like its on its way back to its pre-2015 level. 12 months ago, no economist would have said that oil would bounce back dramatically. Some economists even said it could go lower than $30.

What has this got to do with property?

Property being a large purchase, is usually funded with debt. This month the Fed will be tipped to  announce its Fed rate hike. Interest Rates in the United States averaged 5.83 percent from 1971 until 2016, reaching an all time high of 20.00 percent in March of 1980 and a record low of 0.25 percent in December of 2008. The interest rates have been held near near 0% for several years following the GFC.  As early as 2014, economists were predicting it was time the Fed were increasing the interest rate. This hasn’t happened yet. So far, we have seen mortgage interest rates fall to 20 year lows. Just when people start to take low interest rates for granted, it may turn against you.  All expectations are that this December will be the start of a series of interest rate hikes by the Fed. This will have flow on effects to other central banks like RBNZ. RBNZ usually takes its cues from overseas central banks and take appropriate action.

If the Fed increases the Fed rate, bank’s funding costs are likely to rise even if the OCR stays the same. If the OCR increases, mortgage interest rates will likely increase. One thing you can be sure is that the future is never quite predictable. Those who can’t foresee the future have taken advantage and fixed their mortgages for either 2 or 5 years at interest rates below 5%.  Smart investors know mathematically at 4.8%, they can continue to service their mortgage and are in a comfortable cash flow position. Rather than speculate with interest rates, smart investors fix it at a historically low interest rate and move on to other value add activities (like renovating, or adding rooms).

The lessons are:

  1. In economics, factors like oil prices and interest rates may move slowly. From day to day, you might not see any big changes. But when it happens, it can happen fast and you won’t have time to position yourself. This speaks to the importance of not speculating and always be prepared.
  2. Secondly, as investors, It does not matter what happens to property prices but if you want to be in the property game, you have to be able to hold onto your property. Cash flow is everything in the property game. Paper profits don’t count for much. If you can hold onto your property through ups and downs, 90% of the time you will come through profitable and your wealth will accumulate. Time and time again, the people who have lost money on property are usually those who have overleveraged themselves and caught out at the wrong time. Don’t let this happen to you.

 

 

back to home (Property Guide 360 .co.nz)