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Articles by Matthew Gilligan

Property, Debt and Covid-19

AUTHOR: Matthew Gilligan

POSTED: 22 March 2020

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, that banks lend on closer to 6:1 mixed median multiples (median house prices: median household incomes) in New Zealand. 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 $30 billion 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 are the root of all evil. They will be slapping themselves on the back as people going to the wall lose their shirts. 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.

Request a Meeting

Matthew Gilligan
Director

09 522-7955

mg@gra.co.nz

© Gilligan Rowe & Associates LP

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Disclaimer: This article is intended to provide only a summary of the issues associated with the topics covered. It does not purport to be comprehensive nor to provide specific advice. No person should act in reliance on any statement contained within this article without first obtaining specific professional advice. If you require any further information or advice on any matter covered within this article, please contact the author.

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Hi Salesh, I just wanted to send you an email on behalf of GRA to say how fantastic we have found your company to date. As you know, Ben and I joined GRA a couple of months ago and have just found you so amazingly helpful in getting our new property set up correctly and sorted out. We have what I would consider a rather complicated structure as a result and it’s a fantastic feeling to know that we are getting everything done in the best way possible. We have just had approval to put a minor dwelling on the property which will make a massive difference in terms of cash flow and obviously value, something we would never have even thought of without GRA and which we are very excited about. During the buying process we attended a seminar with Matthew and from the outset thought he was fab. We therein signed up for property school and found this nothing short of fantastic. The content was relevant, up to date and comprehensive, but more importantly it was taught in a way that we could actually understand and really get value out of. I wanted to mention also, that everybody GRA have recommended to us has been just so efficient and absolute masters at what they do. A wonderful network of people that we feel very lucky to now be able to call on. From Kris Pederson and Bryan Rist who put our mortgage together to the insurance guys they then referred us to, I’m super impressed. Within GRA, Ellery has probably turned things around for us faster than I’ve ever known before, something which we appreciated so very much when it came to crunch time. She’s always a pleasure to deal with and again, we’re stoked. We’ve just settled on the property today and are about to go and get the keys. I’m pretty pumped and hence this email is probably rather excitable. So, a massive thank you to you Salesh, the partners for such a fabulous 6 weeks at property school and everyone at GRA for their help. May this be the start of our property empire. Thanks again, - A & B - July 2015

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