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Articles by Matthew Gilligan

Matthew Gilligan

Property, Debt and Covid-19


For those of you who are worried because you are carrying debt on property, I share my perspective on the impending doom that Covid-19 has wrought upon us. 

Just remember, people, banks lend on closer to 6:1 mixed median multiples (median house prices: median household incomes) in NZ. They appear to be up to 12:1 but banks don’t lend unless you satisfy at closer to 6:1. You need to be able to debt service at around double the interest rate you're borrowing at and amortize over 25 years, or you can’t borrow. 

And from 2015 to 2020 you needed to have 20, 30 and 40% deposits. So property owners got all that growth on top of big deposits. The household debt position is not as crazy as some would say it is, when  you look at the prudential controls that have been in place from our Reserve Bank.

And across this, interest rates are halving from mid-2019 to mid-2020. Announced today, the RBNZ has initiated Quantitative Easing (QE), by purchasing up to $30m in government bonds, which should serve to keep interest rates low. 

Next it’s logical for the RB to ease LVRs. Liquidity will be as good as it's been in NZ, as long as banks behave rationally and don’t knee jerk withdraw credit.

Cashflow will be much better in NZ for those carrying debt than, say, people offshore who got the cheap debt 5 to 10 years ago, e.g. UK and the US, and have absorbed its benefit into lifestyle. Kiwis are and will be getting the full relief of the rate drops, as their fixed rates expire. Debt is going to get cheaper. This will help property in NZ. 

And property yields are still good cashflow-wise, when you consider the alternative of shares in turmoil, and cash in the bank. (I'm not saying go buy property, I'm saying yields off bricks and mortar are still attractive.)
 I say don’t panic. It's going to be a rough ride. But ask yourself what's it's worth in 5 years, 10 years? The answer to this question means: do less, and don’t panic. Wait for bargains. Get lines of credit or cash reserves in place, to fund harder times. Protect your liquidity and weather the storm. 

Caveat:
But, if the banks are allowed to tip over, all of the above changes. Myself, I can’t see governments allowing Australasian banks to roll over; they are too profitable and fundamentally sound long term. But hey, anything is possible at present.

Last comment:

Watch for doomsayers. They are the guys that never borrowed a dollar and believe debt and property is the root of all evil. They will be slapping themselves on the back as people going to the wall lose their shirt. They predicted this right? But then every 10 years they are right for about a year. Meanwhile everyone in property knows it has its ups and downs, and they sell at the top and buy at the bottom. But the doomsayers think this is evil, and assume we are not smart enough to work it out. Only they predicted this downturn, only they know what to do. Meanwhile a whole bunch of guys and gals get richer riding the ups and downs as contrarian investors.

In the meantime, stay safe, and follow GRA on Facebook for regular updates. 


Matthew Gilligan
Director
© Gilligan Rowe & Associates LP

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