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RTC29: Why you should care about low interest rates · The Curve

• 0:00
  Welcome to season two of Raising the Curve, a conversation for women who want to
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  learn more about money, via money. For the future they want to have. The pursuit
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  for financial confidence and increasing your wealth should be a simple one. So
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  this is a place for you to learn about investing in finance in a non-scary or
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  intimidating way. Thank you for being here and for listening. Because together we
• 0:25
  really can raise the curve. Now what are we talking about today, that drum roll?
• 0:34
  It sounds terrible, sorry. It's more like a sledding table. We are going to talk
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  about interest rates today. Now, don't fall asleep. Sounds so boring. We're going to talk about interest rates today.
• 0:47
  Oh Lord, okay. No, but they really don't tell me what we're talking about before we come
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  into this year. No, it is, I'll try and make it exciting. Okay, but it's really,
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  really important to understand interest rates because they do have a big impact on
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  different AC classes. So it's a really good thing to understand. So we're talking about interest
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  rates not only for like houses, but across bonds cash. Yeah, just why are we in such
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  a low interest rate environment at the moment and what drives interest rates and why you
• 1:20
  should care? Okay, still not buying it. Okay, go for it. So when we're in a low interest rate
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  environment, like now, this is good for spenders. Because obviously if you're not getting
• 1:37
  your return and for your money in the bank, you're like, screw it, I'm going to spend that
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  money. And so it encourages spending. But it also on the flip side of that, it's bad for
• 1:49
  savers. You get less interest on your savings. Okay. Yeah.
• 1:53
  It makes sense. I had like no, but I mean, some of the stuff that's in my bank, the bank
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  like interest has been abysmal. Exactly. And that's why we like term deposit rates are so low.
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  You know, make sure make your make your savings work harder and all that is because keeping
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  money in the bank is you're just getting such a low return at the moment. Why are we in a low
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  interest stage and how long has it been like that for? So we have been in a low interest rate
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  environment for a while now. And that maybe if we go back to the GFC, to the global financial
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  crisis, when things weren't going too well in the economy and businesses needed help, consumers
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  needed help. So the government uses interest rates as a lever or as fuel to help grow the economy.
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  So if you think about lower interest rates, encourage spending, when people go out and spend that
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  they're helping fuel the economy, they're contributing to GDP growth. GDP. So that's gross domestic
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  product. So that's the kind of the key indicator of how well an economy is doing. It just shows the
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  overall growth rate effectively of a country or of an economy. So is this similar to when COVID hit
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  and they're like, support your locals, get out and buy, take your way. Yeah, kind of similar thing
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  where they're encouraging the masses to go and spend money in a certain way. Yeah, there's kind of
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  two ways to help an economy grow or help it get out of a difficult situation. And that's through
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  monetary policy or fiscal policy. Now don't get don't net those words. I can see your eyes glaze over
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  and just say, oh man, this is a hard one. I'm ready. No, no, no, break down. We're going to break it
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  out. Fiscal policy is taxes. Fiscal does sound like sounds fickle and scary. So taxes make sense.
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  And then monetary is interest rates because it's dealing with money. Kind of think of it like that.
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  So there's two ways. One way is you can cut taxes, which is encouraging spending. The other way,
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  you can drop interest rates, which also encourages spending. Can't sorry. I'm sure most people
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  are listening to understand what you're talking about. But can you actually explain that because I
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  don't totally understand. So when you say they cut tax rates, is that like if someone's salary
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  at the end of the year, rather than taxing them 12.5%, they get taxed 8.5%. Is that that? Yeah. Okay.
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  So if everyone's say the economy is doing badly and a lot of people lost their jobs and people
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  aren't spending because they're concerned that they don't have an income or their income has been
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  cut. And you know, it's just like times of stress or times of like tough times, then if I was earning
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  $100 a week and being taxed 30 and then all of a sudden I'm being taxed 20. I've got to make
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  $10. So I can go and spend that in the economy and then you help grow the economy, then there's more
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  jobs and people are more more people are employed and it kind of goes in a cycle. It's all these all
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  market cycles. No, that makes sense. So there's just two mechanisms by which you can actually change
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  or try and influence people's habits. Yes. Yeah. It's like two policies that you have that can
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  influence spending or saving. So with low interest rates, the Reserve Bank of New Zealand is
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  the organisation that sets the interest rates and has say on whether it should increase or decrease
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  interest rates. Going back to what I was talking about before with the global financial crisis,
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  people were losing their jobs, businesses were closing down, you know, it wasn't a
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  fuss. It was scary. It was scary. It wasn't a fun time to be around. So the government cut
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  interest rates. I think they're up about seven percent back then and they're now down to about
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  kind of one percent. So they cut them pretty drastically. This was how long ago? 2008.
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  So it wasn't even that long ago. No. So they cut them. They were at, say, seven and they're now
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  down to what did you say? About one to two percent. And that's from the great financial crisis.
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  Global financial crisis. But great work as well. So very sick.
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  GFC. The GFC. That's what I was thinking. Yeah. The GFC. So and this is what I mean,
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  where there's cycles and now we're in, we're in Covid times and we're kind of going in and
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  out of lockdown and we don't have that lever because interest rates are so low.
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  Because there's nowhere to go. It's kind of like what happens now? And so you can use the
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  fiscal policy side of things so you can use, you know, taxes and in giving stimulus or checks
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  to people, which is what the government's done. But the key thing is that when you have such low
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  interest rates, it's harder to go lower. Does that make sense? If you're already very low,
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  you don't have a lot of ammunition. Should the economy need another help out or another?
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  It's quite scary, isn't it? Yeah. So that's kind of, is it a, is that a worry?
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  What, what else can they do? Well, there's lots of other levers that they can pull with.
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  This is kind of the most, the most effective and proven way. Yeah. And it has the most
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  positive flow on effects when you reduce interest rates. Yeah, it kind of is a bit scary of
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  on gosh, we're in such a low interest rate environment. We don't have those levers to pull.
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  On the flip side, what is that done to investing? So like you were saying before, how you're like,
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  I'm getting nothing in the bank and you know, that's exactly why we have seen so many people
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  be interested in investing and seeing such growth in the property market, for example,
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  because people are looking at other ways that they can grow their wealth because interest rates
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  are so low that even if you, even if you were investing in things that weren't doing
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  astronomically, well, they're probably still going to be better than being in the bank.
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  Totally. And people are taking more risk and putting putting money or allocating more of their
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  savings into property and shares and and you know, wanting to learn more about the stock market
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  and all that because they have noticed they're like, hang on a sec, I'm not nearly getting as
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  greater a turn as what I previously have gotten with my money in the bank. So that's why there's
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  been such change of habit in the way that people are and that's why there's been such good
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  performance in the stock market and in the property market because people are searching for that
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  return and wanting to get a greater return. I had no idea that's how interest rates worked
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  in terms of them fluctuating. What other, so would they only ever rise if we're doing really,
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  really well and the economy can afford to increase them or why would they grow again?
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  So that's the flip side of it is that people get really concerned. We've got increasing interest
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  rates because it means that the cost of debt is going to go up so your mortgage rates can
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  go up. There's a lot of things that people don't like about rising interest rates and the
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  impact it has on them. But the underlying reason that interest rates go up is because the economy is
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  doing well and we can afford to have them rise steadily, not sharp recoveries, any kind of
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  sharp movement, the scarce, scarce people. So would it go up by like one percent, two percent,
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  oh well, like a quarter of a percent and a half percent. And who's the one pulling those
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  strings, the Reserve Bank of New Zealand? Yes. And then, so they set the rate and decide
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  whether it goes up or down and then the banks will follow what they do. So say they increased it
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  from one and a half to two percent, then the banks will usually follow and adjust their interest
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  rates. But then usually, surely they will have to. Yes, well if one doesn't, if one's like no,
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  or no, if you do it on the flip side. So say the Arby NZ drops their rates and the banks,
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  one bank goes, I'm not dropping mine and the others go, well, I am, then you're going to lose all
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  your customers because everyone's going to be like, hang on a second. All these banks are going
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  so you're like, they all work in unison. Two a degree, there's always going to be little
• 10:00
  like petrol. Yeah, yeah, yeah, exactly. Exactly. My dad has an app on his phone, which searches the
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  cheapest fuel and where it is in New Zealand. So we'll be on a road trip and we're on low petrol.
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  And he'll be like, I'll just check my gas a meter. I just need to get on. There's a five-hour
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  detour to it. Yeah, honestly. Oh, it's old. Two cents cheaper than it's going to be.
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  Awesome. But yeah, great analogy. This is just like petrol prices. They tend to all move in the
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  same way, but they're not all exactly the same. Yeah. Okay. Yeah. So we're on one percent at the moment.
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  Is there any way that we could go below zero? Is that a thing? Yeah. Like negative, like minus one
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  percent? I know. We had it. Yeah. It came in. So there's places in Japan that have got negative
• 10:43
  interest rates at the moment. And if you just take a step back and think about that for a second,
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  that effectively means that the bank is paying you to borrow money. Oh my goodness.
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  Like really? Yeah. So say I went and loaned $50,000 from the bank. They would pay me one percent of
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  that. It's effectively. If they've got a negative interest rates. So when you put your money
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  in the bank and it's one percent positive interest rate, you'll get one percent at the end of say
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  12 months, one percent extra on your investment. If it's negative. Oh, sorry. No, you're paying the
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  bank. Sorry. You don't worry. I'll just I'll correct you if you ever get something wrong.
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  Sorry. I had it right in my head. I just said it wrong. So just cut that. No, no, no. Because
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  it's a one moment where I sound somewhat. Sorry. You were paying the bank. One percent. Yeah,
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  to look after your money. Or four percent or seven percent. But then if you're negative,
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  you're getting an increase on what you're already borrowing, whether it's one percent of that 50
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  grand or two percent. No, I am right. No, you're not. You're paying the bank to look after your
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  money and the bank's paying you to borrow money. It just means that when you deposit money in the bank,
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  you're going to get less when you withdraw it if you've got negative interest rates. So there's no
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  encouragement to save at all. So therefore, people either just going to keep the cash under their
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  mattress or they're going to go and find other means of ways to invest it. And therefore,
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  just the whole system crashes. It doesn't work. Yeah.
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  Yeah, it's quite a mind screw. Yeah, we'll talk about that later, I think, because I'm still like
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  not 100 percent sure what you're talking about. So what happens to the stock market when interest rates
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  rise? So in my opinion, I think we'll probably see interest rates rise soon just because we are
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  in such a low interest rate environment. The economy is doing pretty well, surprisingly during
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  COVID, there's been a lot of government stimulus and all that that I think we and just because
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  our property market is going absolutely bananas, that when you increase interest rates,
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  it does take some fuel out of the property market as well. So it just means that more people will
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  leave a greater proportion of their savings in the bank. They'll put less into property and into
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  the stock market. Why is that? So basically, it means you don't get as good a return from any of
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  your investments when the interest rates rise essentially. So if we look at property as an asset
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  class first. So when we've got rising interest rates, we've got rising mortgage rates.
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  Therefore, these people can take on debt and afford to buy a house. So therefore, I'm not saying
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  that you'll see a property market crash, but you'll see some of the wind come out of the sales
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  of the property market when mortgage rates rise. It's just a natural occurrence. Then if we looked
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  at stocks in the stock market and what happens there. So because interest rates form a part of company
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  valuations because you're discounting cash flows when you value a business, which is a whole conversation
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  for another day, it does impact the valuations of those businesses. So it does take the wind out
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  of the sales of the stock market as well. So it has downward pressure on company valuations,
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  which is effectively company share prices. With both of those asset classes and those being the most
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  kind of risky or the more riskier asset classes, rising interest rates does tend for those
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  asset classes to not return as much as they would if we were in a lot of declining interest
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  rate environments. Because when you said people, not that many people can take on a mortgage because
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  it's higher interest rates and the same thing with the stock market, does that mean if it doesn't
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  bother you the higher interest rates, i.e. the mortgage rates being higher than they would be?
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  Does that mean that you still would get the same return or it would be less because you're paying
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  more for your mortgage? It all comes down to to supply and demand. So if there's less people wanting
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  to buy houses, that impacts the price of your house. I see. So it's not going to be as good of an
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  investment if there's not that many people wanting to buy houses essentially because your value of
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  the house is going to go down because less people want to. Or it's not going to go, yeah, it might
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  not go down but it might not go as up as much. If you had 10 people that were bidding to buy your
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  house because they could all take on a lot of debt because interest rates were low, now you've
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  only got one or two, then you might not get that extra. And how does that then work with the stock
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  market is basically the same thing like more people are selling rather than wanting to buy?
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  It is that because more people will be quite happy just keeping their money in the bank and not
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  taking the extra risk of the stock market. It pays more into the valuation of the companies that
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  you're investing in. When we're looking at investing in the stock market, a share price is really
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  just a reflection of the valuation of the business that you're buying. So you have to look at the
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  share price in relation to the earnings. That valuation is impacted by interest rates
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  because when you value a business, you're looking at the future cash flows and when they are
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  discounted back, you're discounting back at a higher rate, which means you're going to have a
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  lower valuation. So I'm just going to keep it pretty high level. No, that makes sense. I understand
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  that now that you've said it that way. Yeah, so if you're discounting back at a lower rate,
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  then you get a higher valuation. If you're discounting back at a higher rate, you get a lower
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  valuation. So they're just it inversely correlated. So basically what I'm hearing here is invest now.
• 16:46
  Get in while we're at one per cent because when we get to seven, it's not going to be quite as
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  exciting. I guess you need to have a view. Yeah, yeah. I mean, I know you're not trying to
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  give advice, but technically it's a great time to be investing because interest rates are low
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  and therefore you can get more bank fever. Exactly. Yeah, and keeping your money in the bank right
• 17:08
  now and getting a lower valuation. No, no, no, it's it's so low that your retirement is going to look
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  scary. It's pretty scary. It's right for some point, baked beans for dinner. Not the most
• 17:24
  nutritional balance diet, but low interest rates are positive for property and shares,
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  and they are good for the economy and they help fuel the economy and they help grow the economy.
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  But rising interest rates aren't necessarily bad because it means that the economy is doing well,
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  which means that businesses are doing well, which means that you and I are doing well.
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  It's an overall lift up of the economy. It's just having a balance to you.
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  Don't be scared that you may see headlines. We're rising interest rates means the stock market
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  is going to fall. It's like bad news sales. And you know, a headline is supposed to be
• 18:07
  attention-grabbing, but just make sure that you remember that. But hey, that means the economy is
• 18:12
  doing well and we have the flexibility to increase interest rates. So look at it with a balanced
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  from your perspective, Vic, what would be the perfect level of interest rate? You know,
• 18:25
  where you feel like the country is in a good position. It's not impacting you too much.
• 18:30
  Oh, but it's like a sweet spot. I've never been asked it before. But that's having like a
• 18:36
  in a commerce. I think when we have such low interest rates that we do now, it does scare me
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  that if things were to get bad, we don't have that flexibility. But then as a property owner,
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  I don't want more good rates to go up. I don't want interest rates to go up. But I also see the flip
• 18:57
  side of a lot of friends struggling to buy houses and a lot of young families not being able to
• 19:03
  afford houses. And I think having a slightly higher interest rates and mortgage rates would
• 19:10
  actually lend itself to a more sustainable property market that everyone can afford to buy houses.
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  And I know there's a ton of other issues of why in Auckland and New Zealand right now, people
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  can't buy houses and that comes to lack of supply and all that. But I think if we just look at the
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  demand side, if we increase interest rates to three percent and then you've got mortgage rates
• 19:31
  four to five percent say, then I think that would be a pretty good environment. And then with
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  the stock market as well, that's done so well that again, there should be an environment there
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  where valuations of businesses aren't on ridiculous multiples and they're not trading at ridiculous
• 19:50
  multiples. And so I think we are an environment now where we could have a slightly higher increase
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  and it wouldn't have a drastic effect. It's when you get the sudden movements
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  up and down either way that people freak out, people think that it's going to be volatile, there's
• 20:08
  uncertainty and then that's when it lends itself to kind of a rational behaviour.
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  So does that mean you should be selling your house now? No because I don't think it
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  increases interest rates and mortgage rates will cause the property market to four. It just won't
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  be growing by as much. Oh okay. And I'm all about diversification. Okay. There's a song in
• 20:31
  that I think. Maybe you won't sing it. No. Give me a D. Give me a D. Oh god. Amazing.
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  What does leave it there? I think what does leave it there? Give me a D. Oh gosh.
• 20:49
  Thank you so much for joining us for today's episode of Raising the Curve. Please subscribe and
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