If we thought term deposit rates were low at this time last year, well 2019 saw them fall even further.
About the only positive things to observe as 2020 starts is that at least they are above the inflation rate. And at least they are higher here than in Australia. But that will be cold comfort to savers.
And that inflation premium is actually quite tiny - after paying tax, the return will barely cover inflation, no matter what tax rate you are on.
It is not a great time to rely on interest income from term deposits. Rates are low and don't really look like they will be rising significantly any time soon.
Term deposits are no longer about 'earnings' - they are now just a place to park some wealth in a place where the risks of capital loss is relatively low. (But remember, they are not zero - for risk-free you would need to park it in Kiwi Bonds at 1%.)
During 2019, six month rates from the main fell the least, down between -0.55% and -0.70%. Nine month were cut between -0.60% and -0.80% and one year rates fell between -0.80% and -0.90%, while eighteen month rates fell the most, between -0.85% and -0.90%. This is consistent with a flattening of the rate curves during the year.
For challenger banks, they tended to offer lower rates on average for terms one year and less, but Heartland and ICBC offered the highest of any banks. Challenger banks also tended to trim their rates less over the year.
But readers will notice that among these rates, the reductions have been generally larger for tenors of one year and more than the annual OCR change which went from 1.75% to 1.00% in the period. Longer term savers paid the full price of those cuts, and a bit more, (and that contrasts with mortgage borrowers - details here).
| $10,000+, at maturity, pa | 5-6-7 m | 8-9 m | 12 m | 18 m | ||||
| as at the start of ... | 2019 | 2020 | 2019 | 2020 | 2019 | 2020 | 2019 | 2020 |
| New Zealand | % | % | % | % | % | % | % | % |
| ANZ | 3.25 | 2.65 | 3.40 | 2.65 | 3.40 | 2.60 | 3.45 | 2.60 |
 |
3.25 | 2.55 | 3.40 | 2.60 | 3.45 | 2.55 | 3.45 | 2.50 |
 |
3.25 | 2.70 | 3.25 | 2.65 | 3.40 | 2.60 | 3.40 | 2.50 |
| Kiwibank | 3.45 | 2.75 | 3.40 | 2.65 | 3.40 | 2.60 | ||
 |
3.25 | 2.65 | 3.50 | 2.70 | 3.40 | 2.60 | 3.45 | 2.60 |
| Best NZ main bank | 3.45 | 2.75 | 3.50 | 2.70 | 3.45 | 2.60 | 3.45 | 2.60 |
 |
3.20 | 2.50 | 3.30 | 2.60 | 3.35 | 2.50 | 3.40 | 2.50 |
 |
3.25 | 2.80 | 3.40 | 2.80 | 3.40 | 2.80 | 3.50 | 2.80 |
| HSBC | 2.90 | 2.40 | 2.90 | 2.40 | 2.90 | 2.05 | ||
| ICIB | 3.40 | 2.85 | 3.40 | 2.85 | 3.50 | 2.80 | 3.60 | 2.80 |
 |
3.30 | 2.70 | 3.30 | 2.65 | 3.35 | 2.55 | 3.55 | 2.50 |
 |
3.15 | 2.70 | 3.20 | 2.70 | 3.35 | 2.60 | 3.40 | 2.60 |
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3.15 | 2.60 | 3.20 | 2.65 | 3.25 | 2.60 | 3.45 | 2.60 |
| Best of all listed NZ banks | 3.45 | 2.85 | 3.50 | 2.85 | 3.50 | 2.80 | 3.60 | 2.80 |
But despite that depressing situation, you can say that returns in New Zealand are significantly better than those on offer from the same institutions in Australia.
| $10,000+, at maturity, pa | 5-6-7 m | 8-9 m | 12 m | 18 m | ||||
| Australia | % | % | % | % | % | % | % | % |
| ANZ | 2.10 | 1.60 | 2.70 | 0.85 | 2.30 | 1.40 | 2.30 | 0.90 |
| CBA | 2.50 | 1.25 | 1.80 | 1.50 | 2.20 | 1.30 | 2.30 | 1.10 |
| HSBC | 2.05 | 1.35 | 1.65 | 1.25 | 1.95 | 1.10 | 1.95 | 1.10 |
| NAB | 2.10 | 1.10 | 2.40 | 1.10 | 2.40 | 1.20 | 2.40 | 1.20 |
| Suncorp | 2.35 | 1.50 | 2.30 | 1.60 | 2.55 | 1.40 | 2.35 | 1.30 |
| Westpac | 2.05 | 1.15 | 1.90 | 1.10 | 2.30 | 1.20 | 2.30 | 1.20 |
| Best main Australian bank | 2.50 | 1.60 | 2.70 | 1.60 | 2.55 | 1.40 | 2.40 | 1.30 |
Australian rates are now seriously lower there than what is on offer in New Zealand, and all well below inflation on an after-tax basis. And they have fallen much more than their own OCR rate cuts.
Yes, Australian term deposits come with a government guarantee to AU$250,000 but savers pay a sharp price for that protection. When the New Zealand scheme comes into force, expect our term deposit offer rates to fall away as well.
In either country, the possibility of getting a meaningfully better rate by shopping around isn't huge. But a quick glance at the tables above shows there are some opportunities.
If you don't use term deposits as your store of wealth, what should you use? There are options:
Firstly, KiwiSaver funds have the advantage of boosted contributions. True, recent market volatility may have knocked some fund values a bit, but if you are in KiwiSaver for the right reason (long-term retirement saving) you should look past that volatility.
Secondly, some people think residential investment property is an alternative, but it is clear there are significant value risks (both ways), tax risks, effort risks from managing tenants, legal risks from rising obligations under the upgraded Tenancy Act, and leverage risks (where investors forget that can go both ways). This alternative certainly isn't passive. And liquidity when markets go sour can be a real issue.
Also not passive is the option of investing in or owning a small business, but this is another wealth building option. There are many new 'alternative asset' invetment options these days. Liquidity issues can also be a big negative however.
Annuities might be part of your considerations, as might other types of investment funds (including the low-fee index funds).
The bottom line is that these things are easier on you if you take control of them and do it early. You can't start too early.
In a low interest world, the best asset you may have is the wage or salary from a job. Consider this. How much would you have needed to save to get a return of, say, $70,000 per year, pre-tax? If your term deposit rate is 2.60% pa, then you essentially have an asset in that job worth $2.7 mln. And that shows what you might need in retirement savings to maintain the same income. As scary as that may seem, the best chance you have is to save aggressively. You probably don't need all of that, as universal NZ Superannuation is worth the equivalent of about $700,000. Saving aggressively will never hurt, and new higher contribution rates in KiwiSaver will soon aid you in doing that.
Meanwhile, if you are a term deposit saver, be thankful for low inflation, and the fact you aren't facing Australian (or US, or Canadian, or EU, or Japanese, or UK) term deposit interest rates.
Also remember, you have the option of decumulation. Reverse mortgages can be part of that, but despite the enticing advertising, be very, very careful about this choice. It could end in tears just when you have no good options.
21 Comments
If term deposits go lower with the bank deposit guarantee, kiwi bonds will be even more attractive because they will probably not drop further when that happens. In theory small quantity bank deposits become as secure but I wouldn't bet on it.
And as far as annuities go: to indulge in that game you would have to be 100% sure that the company would not go bust!
Term deposits are no longer about 'earnings' - they are now just a place to park some wealth in a place where the risks of capital loss is relatively low. (But remember, they are not zero - for risk-free you would need to park it in Kiwi Bonds at 1%.)
The NZ Government certainly has low expectations for NZ's future economic growth opportunities when it sets official savings rates this low out to four years. The three percent, twelve month deposit rate I extracted from my bank late last year can only mean reward for high risk.
Well these rates of 1% are linked (slightly below) to what the govt is being offered for its bonds on the wholesale market. Which in turn is related to the OCR. Which in turn is related to the required rate of inflation plus some nebulous wellbeing cra..
Supply and demand I suppose.
Supply and demand I suppose - reflecting liquidity risk.
The prospect of out of thin air central bank money creation and rate cuts further discounting future cash flows to higher present values remains the only driver of upward asset price momentum. Graphic evidence
Courtesy of Hussman :
The idea that “low interest rates justify high stock valuations” is really a statement that “low interest rates justify low expected stock returns as well.” Those high stock valuations are still associated with low prospective future stock market returns.
Worse, the notion that “low interest rates justify high stock valuations” assumes that the growth rate of future cash flows is held constant, at historically normal levels. If, as we presently observe, interest rates are low because growth rates are low, no valuation premium is “justified” by low interest rates at all.
Presently, the combination of record low interest rates and record high stock market valuations does nothing but add insult to injury.
So the country and the speculators are dependent on the oldies shifting their savings from term deposits to stocks and other risky ventures which many of them don't understand or don't have the inclination to manage ? What a shame ? If the country's leaders cannot come up with worthwhile schemes to develop the economy, other than robbing the oldies of their saved funds, we are in fire straits.
Remember even the expert pension fund investors all over the world and fund managers were ribbed by the quants who engendered the GFC, which benefited only Goldman Sucks & Morgan Stealy and Warren Buffet ( the ultimate insider).
The oldies are not going to be fooled. They have better life experiences. Only thing is they don't have a common group and a voice to represent them, like the AARP in the US.
Low inflation low interest rates low growth, low everything.
This is will continue for a while yet.
Know someone who put 700k on a TDs spread over quarterly. av 2.8%
If same was put in a Fund would get 20% in 2019.
What can a man do , risk it and get rewarded. Would have taken a beating at 70% loss and you would come out tops
Agreed Yvil.
Those who retired five to ten years ago expecting the returns from their term deposits to supplement their superannuation will be finding that they will be returning well under half what they would have expected and having to reconsider their strategy and especially their risk tolerance.
While boomers have been criticised they have not been winners here. However, over the past decade the emergence of a low interest rate environment and considerable increase in house values, there will those generation X and Y - who seem very, very quiet - who are real winners purchasing homes in 2010/112 when mortgage interest rates were around the 8%. These generations have been double whammy winners as their mortgage interest rates and payments will have more than halved and their homes doubled in value.
Boomers who own property have too been winners, are you suggesting their properties didn't increase at the same magnitude as those Gen X and Y's over that same period in time? Many of these Boomers also would have bought in the early 70's and seen inflation halve their debt burden in 5 years, hence Muldoon had to freeze their wages in the early 80's. Boomers go on, and on, and on, and on about buying property at 20%+ interest rates, now interest rates are below 4%.
Yes it sucks for all those Boomers relying on Term Deposits though, I guess their 1975 vote for Muldoon (in protest of Labour's "communist" superannuation plan in favour of a universal super) has backfired, you've made your bed now lie in it. Millennials are often mocked for their supposed poor financial planning, I implore any Boomers finding retirement a struggle due to their returns on Super or Term Deposits take a look in the mirror for a change.
Isn't your conclusion similar in nature to the boomers supposed comments about the millennials needing to suck it up and become responsible for their life and savings?
Maybe empathy for others situations might come back in vogue someday. Based on some comments, I shouldn't hold my breath waiting for this to happen.
Personally, I require return of capital rather than return on capital. As long as returns keep up with inflation, I'm good for another 40 years or so. Saving aggressively at an early age pays serious rewards.
The whole house inflation thing is a bit silly as a generational comparison on wealth generation, as the returns on the share market have been far superior to housing returns for many decades, albeit with more short term volatility. The returns have been far larger in the last decade, which would benefit the younger generation handsomely if they didn't waste their money trying to climb the property ladder. Look at the returns for a dollar cost averaging investment in an index fund over the past decade or two. This investment approach generated far superior returns than the equivalent unleveraged investment in housing for virtually all time periods. Focusing on just property as the wealth generation method is seriously flawed thinking. The past decade has had a huge gain in the share market, dwarfing the relatively small gains in the property market. Fortunately, the property affordability hasn't changed much in the last decade due to the large reduction in interest rates.
My suggestion, save aggressively from a young age, invest in indexed funds, and buy a modest house after one has saved enough so that one isn't putting ones entire savings into the down payment. It is also good to live modestly, which helps the aggressive savings. Live beneath ones means, at least for the first two decades of working.
frazz
You miss the point.
Here we are talking interest rates. Those X and Y who bought houses around 2010/112 would have been paying in the order of 7.5% will now be paying about 3.5% - around about half that. So while those who hold deposits as rates have been falling they have lost out; however, hand-in-hand with interest rates falling so to has the interest payments on mortgage will have been falling. See the losers and winners?
Also frazz, it is more than just "feeling wealthy". With rise in house values has meant an increase in equity; this does not have to be realised, but can be used as leverage to buy that new car, new boat, take a holiday, start up a business, buy a holiday home or a rental property - and all at historically low interest rates while mortgage payments on that 25 year loan being a lot less than in 2010/12. So it is a lot more than "just feeling wealthy".
So yes, falling interest rates have benefit a group of generation X and Y considerably in a double whammy.
So Gen X and Y are "winners" by topping up their home loans? I mean sure, topping up your mortgage to buy a $30k car at 3.5% is better than financing it at 9.95% but by no means is it winning. The loan still needs to be paid back.
I've seen a 40%+ increase in equity in the 2.5 years I've owned my first home, my mortgage broker thought I was a winner until I declined the opportunity to extend my credit to buy a new car or fund house renovations.
Low inflation low interest rates low growth, low everything.
Problem is that price inflation is not necessarily "low". Inflation as represented by the CPI is low. The CPI is simply a construct that doesn't necessarily have any relevance to the cost of living.
If same was put in a Fund would get 20% in 2019
20% on gold too. The annual return on the gold price in NZD has been as good as or better than TDs over the the past 15 years or so.
Only if banks stop creating credit:
I wasn’t aware of any floating exchange rate central banks that worked on any basis other than that, for the banking system as a whole, credit and deposits are created simultaneously. He quoted the Bank of England to that effect: I matched him with the Reserve Bank of New Zealand. Link
Deposits are nothing other than someone's promise to pay in the future.
There's never been a banking crisis due to too much lending to small manufacturing firms. Riskier borrowers are those using the newly created bank credit to purchase assets, financial or property. Ban bank credit to non-GDP transactions & forget all other regulations. No crisis Link
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