For those who don't know me, I'm Matthew Dawe. I'm a mortgage broker and financial adviser. I'm accredited with 70 lenders in New Zealand, as well as all the major banks, so BNZ, ASB, Westpac, ANZ, SBS, Cooperative, Kiwibank and there's about 60 others. There's a massive non-banking industry out there.

We help clients get pre-approved, help them negotiate interest rates, and provide financial advice along the way. So, a little bit about me, it's myself, and I've got a team of four helping me.

I've been a financial adviser for 15 years, and a mortgage broker for seven years. I'm a bit of a markets guy, so I'm a bit of a nerd, and I'll try not to bore you, but before I was a mortgage broker, I was actually a foreign exchange dealer. So, essentially, my job was to help corporates with their foreign exchange decisions, our counterparty banks were Citibank, Barclays, and UBS, is who we mainly dealt with. I've been a property investor for 20 years in New Zealand, and Australia.

Love Ron's chat about Australia, I agree.

So, in an increasingly confusing mortgage environment, we take the stress and confusion out of the mortgage process, help you get approved, help you get clarity, and move forward. So, interest rates, what's going on, and where to from here? So, I just want to touch on, where we've been quickly, and you'll hear, some people talk about an oil tanker, you know, to describe the economy, or interest rates.

I love that analogy.

So, let's talk about this for a little bit. Anybody remember before, like, COVID, everyone was talking about deflation, and 0% interest rates.

Does anybody remember that?

I remember when the five-year fixed was 2.49%. And everyone was talking about lower rates. Everyone, including me thought rates are going to go lower. In Europe, they actually had negative deposit rates. So, you had to pay to put your money in the bank. True story. So, interest rates were zero, basically around the globe. That's where we were. Economic growth was actually okay around the world, not too bad. Pretty utopia, eh? Zero rates and good growth.

So, what happened?

COVID happened.

So, COVID was interesting. The whole economy basically shut down. Governments around the world panicked because if you could imagine, you can't trade, you can't do deals, you can't go to work, you can't buy the milk. So, it was scary. So, basically, governments panicked.

The Reserve Bank dropped the rates. The rates were really quite low, but they dropped them to zero, and they pumped in 80 billion bucks. Which is 30% of New Zealand's GDP basically in a few months. The government also, as we know, increased their spending a lot to support businesses and individuals. We can talk about the politics of it, but basically, they increased their spending a lot. Government spending increased 50-60% over the preceding year or two after that. So, what happened? You've got a huge increase in the money supply because everyone panicked.

Guess what happened? The economy opened and actually, everything went pretty well. People had money in their pockets. They hadn't been spending money for a period of time. Nobody's buying cars, going on holidays. So, what happened? There was a huge demand that pumped up prices just when supply was really low.

When I was writing my notes here, I was in the market for a jet ski at that time, which is quite interesting. Jet skis went up 30% to 40% because there were a whole bunch of middle-aged men and younger guys who wanted a jet ski but hadn’t been on holiday, and you couldn’t get one. Any jet ski you could get had multiple offers on it, and the jet ski dealer on the North Shore basically had control of half the market.

He said, “I can’t get anything. They put in an order overseas for a new one, but the factory has been shut for six to eight months.” So he was basically saying, “I’ll get you one, but it’s going to cost 10 grand more than the asking price. Do you want to do it?”

Everybody remember used cars around that time? Two- or three-year-old used cars were actually more expensive than new ones because demand was so high and supply was so low. As a result, inflation went up. There was a lot of money and demand chasing a very small amount of goods.

So, inflation went to 7%. Straight away. How did the Reserve Bank react?

During COVID, the economy — like an oil tanker — essentially stopped. They jammed their foot on the accelerator and put four tugboats behind it, going full steam to try and get the thing moving again. But the tanker was already moving pretty well anyway, so they pushed the whole thing into hyperdrive, and inflation went through the roof.

So, what did the Reserve Bank do? The reserve bank basically jackknifed the rates upwards after that and we went from zero to five and a half percent within 12 months after that.

Why?

Because inflation was really high, demand was too high. Don’t forget, the borders were still semi-closed, so it was difficult to get labor. Unemployment was around 2%, I think. Labor costs went up because everyone was asking for pay rises — your boss couldn’t get a replacement. People were basically saying, “Give me a 10-grand raise, or I’m going somewhere else.”

You had this kind of spiral. It was kind of scary. I remember sitting at my desk in late 2021, watching the rates just keep going up and up and up. It was like watching a train in the distance accelerating. You want to slow it down, keep it at a safe distance, but it’s terrifying. What I was thinking was, “This is going to be a disaster in a year or 18 months. I hope they release the pressure a little and bring the train into the station, let the oil tanker slow down gently.”

But no — they just kept the rates eye-wateringly high for a long period of time.

So, what did the Reserve Bank do? That oil tanker that was moving really fast — they hooked tugboats with massive ropes to it and put the tugboats in reverse. The operator of the oil tanker cut the engines and put them in reverse as well. The tanker was steaming along, and basically everything was just trying to pull it backward.

And what did the Reserve Bank do? The tanker started to slow down a bit, and they just kept the pressure on. They really rammed it home. The thing I thought was really strange is that the Reserve Bank seemed to think it wasn’t working — but it was, at least a little. You could kind of see it working.

Then they came out and said, “We want a recession to happen.” That was insane. If you had no money in your pocket beforehand, you certainly had even less after that. They were so fixated on stopping inflation.

As a result, we had a recession, and New Zealand experienced no economic growth for 18 months.

Wages were up 20%. I like what Ron said, because wages are up 25 to 30% since COVID. Meanwhile, house prices have gone down, but rents have gone up a lot. I know they’ve cooled a little now, but rents also rose significantly since COVID. Unemployment started to trickle up as well — now it’s around 5.3%.

Talking about businesses, unemployment is usually the last thing to go up. If you’re a business with skilled employees, the last thing you want to do is let them go. You’ll hang on to them as long as you can. But when sales drop, margins are crushed, and the economy is really bad, you eventually have to let someone go. Usually, though, you try to hang on. Unemployment is literally the last domino in the cycle — and it’s still rising at the moment.

So, what’s happened since then? By the day, all tankers almost come to a halt, and the Reserve Bank goes, “Oh, that’s a surprise.” Then there are nine interest rate cuts in a row.

Why?

Because they were late — here we go again. My opinion on this is quite interesting: I think the same thing has happened for about 50 years. It’s kind of a New Zealand thing. They tend to be really late and slow. I don’t know why — maybe the economy reacts faster because we’re a small country or something. Either way, I thought they were extremely late, and it caused a big problem.

So, nine interest rate cuts in a row. The retail interest rate peaked at 7.25%.

About 15 months ago, if you wanted a one-year fixed rate from your bank, it was 7.25%. Now, it’s 4.49%. Nine cuts in a row.

So, how's the oil tanker kind of doing now? Well, inflation has come down to 3%, which is really good — though there’s more to discuss. Economic growth remains average. According to the latest Reserve Bank report, inflation is currently 3.1%, which is slightly up and a little concerning.

Why is it going up? The economy's rubbish and the reason is rates and insurance. So, if you're Auckland Council and you've had a huge increase in costs that takes a little while to kind of feed through. What the Reserve Bank said was out of that 3.1%, he reckons majority of it is rates and insurance.

Has anyone got an insurance renewal on their homes recently? I got mine this week. My premiums went down, which was pretty cool — that was with Tower. I was shocked. I was like, how in the world did my insurance premiums go down? That is weird. Like, the last five years it's been 10, 5, 5, 10, 15. So, I was like, oh yes, because I was worried getting prepared for like the punch in your guts, got another massive increase but my premiums went down. My sum insured went up, to account for inflation and the cost of rebuilding.

So, the sum insured actually went up, but my premiums went down, which was pretty cool. A few properties, some of them went up a little bit, some of them went down, but overall it went down, which was pretty cool.

Rates have gone up a little bit, but still probably we're getting to the natural end of that sort of cycle — there's a lot of political pressure on the Auckland Council. So, that's what the Reserve Bank's saying — they're saying it's 3.1%, but we expect it to go to two and a half. So, the Reserve Bank's expecting inflation to drop moving forward. I agree with that. That's my opinion.

Now, one thing I wanted to touch on. Is anybody notice the interest rates went up just before Christmas? That was insane. I couldn't believe that.

So, here's what the Reserve Bank did before Christmas. They cut the rate 0.25%, then they said no more cuts. That was insane. Why would they do that? Some of these guys, you wonder if they've been in a trading bank before?

So, I'll put this example to you. Say I’m managing a police pension fund in New York, handling the superannuation for police officers. It’s a big fund, and I decide to put some money into a New Zealand bank so it can be lent out to the real estate market.

What do you think happens next? I want a bigger return on my money. If I’m lending this money to a bank for three years to fund three-year mortgages, I’m thinking, “Rates are probably going to be higher in three years, so I want my return now.” That’s how I approach it.

It’s a bit crazy — they cut the retail rate, but the wholesale rate actually went up.

Has anyone been in a good position because of what they said? That was a mistake. What they should have done was cut the rate and say nothing.

So, the thing is Anna Brennan, the new RBNZ governor, she got sworn in a week later and she came out with a special press conference two days after she got sworn in and tried to reverse some of the damage done by some moron who's probably got 30 years experience, but no markets experience. He should have just cut the rate and said very little, being extremely careful with his words.

That one comment had a tangible impact. The swap rate went down slightly, but in my opinion, that comment alone knocked about half a percent off economic growth in New Zealand over the next 12 months. Personally, I felt confident going into Christmas, thinking the next year was going to be strong, and then — boom — this unexpected blow. The newspapers exploded with headlines: rates are going up, the property market isn’t what it used to be. I thought that was insane.

Why did they do it? The Reserve Bank wanted to improve the economy moving forward, but through a misstep, they actually put a strain on it instead.

And that’s basically what happened.

So, the rate went up a little bit, especially the longer-term rates just before Christmas, and they've since come down. So, the latest report by the Reserve Bank was last week. They kept rates on hold, and what did Anna Bremen do? We don't know, and she came out and said, we don't know what's going to happen moving forward. She didn't make a stupid mistake by saying we're going to jack the rates. She just said, we're keeping rates where they are, we expect the inflation to fall and we are not, we don't know.

In fact, you look at the — I've studied this before — there's a nerd coming in. You study the report, because in financial markets, you're taught to study the exact words.

She said, “For the foreseeable future, we are not touching the rates.”

Why?

Because the moment she changes one of those words it affects the police pension fund, interest rates, and overall economic activity. So, she said that, which is really smart. She kept the pressure off the rates, which was good.

On the back of that, the wholesale rate dropped, ASB dropped their two-year rate. Westpac dropped their three-year rate, BNZ dropped their other rate. But basically, all the swap rates come down a little bit — two of them — what they were before Christmas but the damage has been done, in my opinion.

I don't know how you guys are feeling, but I thought that was significant, because all the newspapers want to start talking about that sort of stuff. So, anyway, a little bit more sensibility in the Reserve Bank, which is good.

So, to give you an idea of the rates now, a six-month rate is about 4.45% — they've gone down in the last two or three months. One year is about 4.49% at the moment.

So, 4.45% for six months, 4.49% for a year. Eighteen months, you come up a little bit to like 4.6%. A two-year is 4.69% — it was 4.9% before the last Reserve Bank announcement.

So, that's how something that they say and not say affect the rates. So, 4.69% for two years. Three years, about 5%.

Westpac's got the market leading at the moment. I expect them to change, but yeah, 4.99% from Westpac for three years, pretty cool.

Not financial advice, by the way. All of this, just meeting my obligations there.

For four-year terms, rates are around 5.1% to 5.3%, and five-year terms are about 5.5%. Some banks are slightly below those levels.

So, you've got a one-year at 4.49% and a five-year at 5.5% that's roughly where the rates are now. Nine cuts in a row, as I mentioned.

Projections, this is what you're all interested in, probably.

A few things on this — if a one-year is 4.49% and a five-year is 5.5%, you're going to pay 1% more every day to figure out if you're right or not. For example, calculations in my go is 4.4% but 4.49% is available now — so you've got that option. The other option, let's just say the most extreme, is 5.5%. So, you're going to voluntarily pay 1% more every day to figure out if you're right or not.

So, what does the rate have to be to break even on that theory? Another 1% higher.

So, you're paying 1%, does that make sense? So, let's just say 4.5% and 5.5%, well, the break-even rate is 6.5%, which is another percent, because you're making a loss every day to then try and make it up for the loss.

So say, if I'm paying 1% more for 18 months, and then I'm making a profit versus the one year I could have got, but I'm still making up for the losses. So, your break-even point is 6.5%, which is eight interest rate rises, reversing the entire nine cuts we've had.

Meanwhile, the oil tank is not even moving. They've just wrecked it. They've punched it in the face so much, this won't even move. Trying to get it going as long as I stop making mistakes.

So, as you can tell, I don't like long-term rates, if you haven't figured out from that conversation. New Zealand's too small, It's too expensive. Like the US, you can borrow 30-year money at like 6%, New Zealand is just too small. It's too expensive.

I always use this analogy — and someone can check the math on this — but if you had chosen a five-year rate in the middle of the year, every year for the last 20 years, you would have been wrong 17 times. In other words, you would have paid more.

Why? Because you’re effectively paying a 1% “penalty” every day to see if your decision was correct.

That said, you still have to do what’s right for you. Protection is important. It’s wise to spread your risks and be prepared, because no one knows exactly what’s going to happen.

By the way, the years that they were right was COVID. And I had out of 180 clients, I had one guy fixed for five years. I tried to talk him out of it. How stupid was I?

So, the answer is nobody knows what rates are going to do moving forward. So, what does it kind a feel like now? We know that all tankers, being in the ring with Mike Tyson: it's bruised, it's battered, it's not moving. The tugboats have come off. The Reserve Bank's trying to put the accelerator on. So, the propellers are turning — I don't know how you guys feel, but it seems as though the tank is really not moving, like it's maybe moving a little bit and people go “oh, it's going to be roaring in like six months” Like, really?

I hope, but we don't know — that's sort of what it feels like. As a consumer, it's interesting listening to the questions tonight, because I think that's a general feel of the market. Like people are feeling beaten up, interest rates are being high, cost of living is being high, rates, fuel and insurance.

My wife reminds me of how much everything's gone up — like utilities. So everyone's really beaten up. I think everyone's pretty cautious. So, you think about that momentum is pretty lethargic, let's say.

So, that's my opinion on it.

My gut feel is it's going to be another rate cut. I'm just going to put it out there — that's not financial advice and I could be wrong. I just get that feeling.

It's not we were having the exact same conversation a year ago with clients, and I remember someone bank came out with like a 5.99% for five years and have my phone went crazy.

Saying, “Oh, Matt, I'll take the rates, I't's going to go up next year!”

And I’m like, “Last time I checked, we’re in this session,” — you know what I mean?

Rates are pretty high still. So, I think it's better now, but it's still a sort of similar lethargic thing. I could be completely wrong about that, but I just feel, if the economy does not recover this year — P.S. election, bad weather, winter coming, everyone feeling annoyed, under pressure and cautious — I get the feeling that they're going to have to go again. I could be wrong about that, but that's just the feeling I get and everyone's talking about the rates going up.

What’s that about? The Reserve Bank — being not thinking what they're doing. So, not that I'm at the Reserve Bank or have their pay grade from a little mortgage-broking company in Auckland.

The other thing I was sort of going to mention was, how we talked about the Reserve Bank overcompensating?

When things were going really well, their tanker was really slowing down. They had all four tugboats pulling in the opposite direction and the engine in reverse.

Guess what's going to happen this time? Guess they're going to do the same thing?

They've done that same thing — every decade for six decades in a row. So, they're going to go too far and they're going to cut the rates too far but we don't know where that is, but I feel like they might panic. If we might get more cuts — it’s tricky, because they can’t really make a major decision two months before the election — they don’t want to appear political. That timing constraint effectively rules out September for any action.

We've got five months basically. So, if the economy does not recover, they might go, “We need to go now,” because we can't go in six months in winter maybe.

It’s interesting reading the newspapers because last time I checked, whatever is expected never really ever eventuates, because that's called a perfect market in your training, when you do your degree and all the rest of it, they say about a perfect market is impossible.

Perfect market is everybody expecting the same thing and that thing eventuating that's what a perfect market is. It's impossible.

So, the answer is nobody knows what's going to happen, but whenever I read the news, it's kind of like, “Oh, I'm going to expect the opposite” because that's what usually what happens.

So that's my two sense on it.

I'm offering free strategy session or strategy reviews where you can discuss your situation and get your questions answered, get some advice and feedback. If you're interested in that, you can just go to my website here and we've got a contact book page. You can just book it on instantly that suits you.

That's it.

Questions? We've got time for questions.

Yes, sir. Good looking man in the back.

Person 1:
Where can we find out what the swap rates are?

Matt:
From my trading days, we used to have what's called a Bloomberg Terminal. It's two grand a month though, and there would be instantly available to all traders and dealers. The answer is — the only available is three. I'm going to give you two websites.

You've got the swap rate on the interest.co.nz website, but it's not second by second and it's a bit delayed and it's hard to kind of work out. The answer is you need to have a Bloomberg Terminal. You wonder why he's a billionaire because all banks, all traders, all dealers use Bloomberg throughout the entire planet. Not many people know that because it's kind of behind the scenes.

The other one I've mentioned to you is called Forex Factory. If you're interested in Forex Factory, go to the calendar and it will tell you what's expected and then it gives you all economic data daily by the second for free — this is my nerd in me coming out. You can check what's expected and then you can gauge to get a feeling of not only the New Zealand economy, but the US, Europe, Australia, etc. — you can kind of get a feel.

If you guys are in my private client group, I put screenshots of graphs up on there. Those are the two websites I'd give you without paying two grand a month, you're not going to know unless you've got a mate who's a trader at a bank.

I'm not talking New Zealand banks. I'm talking about large global industrial commercial banks, not little, they're big retail banks. Retail banks in New Zealand, it's a different industry.

Hopefully, that's helpful.

Person 1:
I've tried to read what Australia is doing, because generally they're about three to six months ahead of New Zealanders.

How does that, in your mind, New Zealand being following Australia or has it been up and down?

Matt:
I find it fascinating what happens in Australia. So in Australia, you know that oil tanker scenario where we just made the tanker stop? They didn't make it stop.

They pulled pretty hard but then kind of released the pressure a little bit, but smarter.

It doesn't always work. The Australians doesn’t always make this happen but in this case, they did. Their economy wasn't as affected as ours. The more recent ones is their inflation is 3.8% to 3.9%. They've had one rate rise, they're going to get another one and probably another one — P.S. the floating rate in Australia is about 5.2%. They float, they don't fix.

Think of New Zealand's 4.5%. They're 5.2% to 5.3%. So their rates are already three quarters of a percent higher than ours and they're going to get another rate increase and probably another one. So meanwhile, house prices have gone up a lot.

P.S. I love what you said, Ron, because I've got properties in Australia. Stamp duty, land tax, estate tax, top personal tax rates, 45%. Guess what happens?

The economy is going to go like this. So Australia is going to slow down. We're going to speed up. All those people that think they left, I don't know how many people are going to come back. I've read statistics like 50% of people come back or 70%. So it's just going to come and that's going to add to the demand.

So that's my opinion on Australia. Taxes are unbelievable.

Person 1:
This is a review of the 1980s. Grass is greener in Australia between pretty much 80 to 83, 84. A lot of people come back, 80% is a safe place.

Matt:
Yes. What's the latest thing the Australian government's putting through the parliament?

The capital gains tax discount.

So if you keep a property more than a year, you get a 50% discount. The government's got no money. So what are they doing? Labour government is going to get rid of the capital gains tax discount.

So if I sold a property in Australia, I'm going to pay it my marginal tax rate for that year, no discount. So if you make 500K, you're paying 45%, well, top tax bracket, they'll scale it, that's going to happen to every single Australian or every single investor in the entire country. That's even before you talk about land tax — P.S. Victoria's bringing in land tax.

The state government's not broke, but 50% of state revenue comes from property taxes.

In New Zealand, no stamp duty, no capital gains tax, no estate tax and no land tax.

“Oh,” but I pay $2 a litre for fuel. Oh my God.

It's unbelievable. But yeah, Australia is going to slow down. Their growth is already under 2%, ours is probably 1%. We're going to go to 3%, they'll go to 1% probably. I don't know, just if they're going to get rate rises.