When will interest income become viable again?

Hi All,

One of the explanations I hear repeatedly for ploughing money into RE at any cost over the last several years is high net worth individuals with lots of $$$ and nowhere to 'park' it apart from RE - the famous TINA argument.

With upcoming IR rises all but locked in - at what point does TINA no longer apply and interest income become an alternative ??

Current term deposit rates are just over 1% etc.
At what rate do people with several million to 'park' feel like interest income might be an idea.

e.g. $5mill at 5% = $250k ??

Em

 

Pretty much never at any realistic rate or economic environment.

 

I guess we shall see. But clearly there’s a market for it otherwise no bank would ever offer term deposits?? Plus wasn’t this a viable strategy for retirees when ir were 5% plus?

 

Yes people use them but they're not going to replace high net worth people parking their money in real estate.

I doubt it was ever a viable strategy for retirees because of a number of reasons. Maybe as part of a mix of diversified investments, but even then, probably not a big component.

You've come into this with some big assumptions - did you read it somewhere or something?

 

In 1997 the banks were paying interest at 9% pa but only charging 10% on mortgages while the commercial properties were yielding 11% to 14% .

 

This is closely related to the thread I started recently, see:

Is cash making a comeback?

In my opinion holding a bigger % in cash is becoming more attractive.

 

High net worth individuals are different to the average mum & dad, with a fear of investing. Many older retiree's use term deposits, because they are considered 'safe', but they often don't have a lot of money compared to the wealth of high net worth individuals. For instance, an elderly family member had $30k to their name before they passed. This was kept in a term deposit. It's much too small to buy a house with. It could be put into shares, but they considered shares to be too 'risky'.

 

I think the answer to the question, is that cash in a savings account becomes compelling once interest rates exceed the rate of inflation (which is unlikely to happen any time soon). In such an environment where rates exceed the rate of inflation, we have positive real interest rates, which make savings attractive.

As many have mentioned above, you also want to keep some cash on hand for an emergency, and to keep some powder dry as an investor, even if rates of return are low in the meantime.

Hope this helps.

 

And many investors will keep this cash in an offset account, which reduces the interest payable on a loan.

 

When the ASX drops its bundle and people panic. As rates rise dont expect banks to become generous

 

I remember having a term deposit for circa 6% just before the GFC. Even when the GFC hit there was such a demand for deposits to prop up bank balance sheets, they were throwing out high rates everywhere

Even ING savings accounts, etc used to offer 5%. Was a good place to park money, and encouraged you to really save.

Fun times.

Was very attractive to hold cash then.

However with massive inflation now, you are probably best off buying whatever you need now, rather than waiting for a cheaper price later.

 

Cut/paste from my ING statement of 30/9/2007:

Current interest rate: 6.15%p.a (variable rate at 15/08/2007)
Promotional interest rate: 7.00%p.a. (variable as at 17/09/2007 - 31/12/2007)*

Thinking was different back then - why drop $$$ on new car/boat/whatever when leaving it in the bank was earning decent interest. Now the thinking is it's not earning anything, so may as well spend and get some lifestyle benefits...

 

Not sure I have statements saved from back then.. might be able to find them on paper in the cabinet..

Oldest for me I can find online is for 2015:

Standard Variable Rate as at end of statement period: 2.25% p.a.

So if 2007 was circa 6.5% (my 5% above was a bit of a fuzzy remember guess).. 8 years later was 2.25% .. Now in 2022 or 7 years later again it's 0.05%.. -6.45% in 15 years.

I remember calling ING during the GFC to ask them if my funds were "guaranteed". There was real talk ING would go under in EU. They gave me some vague answer, ha! The government came in to guarantee deposits under $100k, but only with the big 4.. I think I spread my dollars around a bit more after that.

 

I have all statements scanned back to the early 1980's. I might be a bit mad, but anyway I have them!

In Australia there is the $250k govt guarantee per person per deposit taking institution.

In the EU (where I am now) there is an equivalent system, up to 100k€ per person per institution. The financial authority in each country publishes a list of covered institutions. It also works between countries and currencies, so that a resident in one EU country with an account in another EU country is also covered. Also some non-EU countries are also covered.

More info here: Join European Forum of Deposit Insurers (EFDI)

 

Ok I hope this sticks… my bucket list includes coming up with a unique acronym lol.

This is original material I came up with during a bush walk today :

B ank
I nterest
N ow
G ood
O ption

I’m a bit early but after June few people may go for the bingo option

Em

 

Holding cash in general, other than for liquidity in a pinch, is holding a depreciable asset.

Interest barely helps hedge against true inflation.

I have HNW friends and acquaintances that hold some (relatively negligible) funds for interest income. However we are talking private lending, which is currently at 8% for first mortgage, and 15%for second mortgage loans.

Most of their money is split between businesses, real-estate, and stocks.

Real-estate, precious metals, are a way to hedge against true inflation, and perhaps make a little on top.

Here is a recent video by Ray Dalio.
He is an American billionaire who runs the world's largest hedge fund.

 

I once read an article that talked about how attitudes towards investment had a reasonably strong correlation to ones year of birth. e.g. growing up in a period of war, or a bear market, and you'd be less likely to invest in risk assets, throughout your entire lifetime and more likely to hold cash. The reverse if true for those that grew up and saw great wealth generated from bull markets.

Historical rates of growth on shares & property have been greater than holding cash in the lifetimes of most people who have amassed their wealth (old & young) that are still living. HNW individuals can stomach the volatility, and have been rewarded for taking these risks for the better part of their lifetime. It's unlikely to change, unless we go through a prolonged period of traditional risk assets declining.

 

If RE and stocks decline gradually over the next 24 months and the cash rate gets to say 3% or more for term deposits, are we saying no one will consider cash as a partial option but prefer to stay in stocks and RE?

 

there is difference between Nominal interest rate (what you get from bank) vs real interest rate (after inflation)

if inflation is at 7pct, keeping cash at 5pct means your real purchasing power decreases so you are 2pct worse off every year. Cash dont capital gain whereas equity/RE will increase invalue with inflation

 

I had several term deposits in Australia at 17.5% (around 1990).
In those days those investments were a pretty good thing, the ultra low rates of today are abnormal and I don't think will last, somewhere between 6-10% would seem more normal, but not to younger folk.