How should tradies react to interest rate rises?
Things sure are changing fast in NZ. Just a few months ago we had record low interest rates and the Reserve Bank Governor was telling us inflation would be “transitory”.
Turns out that was completely wrong. Inflation is anything but transitory, and the inflation rate is already at 5% and punching higher by the day, way higher than the 2% the Governor was told by the government to keep it at.
Of course, months ago the Governor could have picked up the phone or gone out to have a chat with a few tradies and learned what we all knew already - that inflation was already way more than his target number.
When inflation goes up above the target, the Governor opens his toolbox and pulls out the only useful tool he finds there – the Reserve Bank wholesale interest rate.
By increasing this wholesale interest rate the banks also have to increase their interest rates and people slow down the amount of borrowing they do, which eventually brings inflation back down to that target figure.
Trouble is inflation is getting up so fast that the interest rate rises needed to pull it back under control have to be severe.
Check out the graph below which shows the 10-year wholesale interest rates heading sky high. These wholesale rates quite quickly flow through to the rate banks and finance companies charge.
What does all this mean for Kiwi tradies? Three things.
1. Be extra cautious about taking on debt for property or launching into property developments
Over the past few years some tradies have made some good profits from property trades or developments. Those good times are probably over. With interest rates going up, buyers are going to be less able to get finance. This leads to fewer buyers for development properties you might be trying to sell.
If you’re a tradie doing property developments on the side, the last thing you need is to be caught needing to sell a property while paying increasing interest on a loan.
2. Pay down debt
Not only is it a bad time to take on more debt, it’s sensible to be trying to reduce your debt. This applies to all forms of debt, be it property finance, vehicle finance, machinery finance, credit card finance or bank overdrafts.
It’s a good time to review all types of finance your business has and make an all out effort to reduce it. I suggest starting with the priciest types of finance, such as overdrafts and credit cards. Getting rid of this debt will pay off in coming months as even these rates are bound to go up.
3. Focus on the basics
Regardless of the impact higher interest rates have on the wider economy, the demand for good reliable trade businesses is going to remain. Even though the current interest rate rises signal an end to the property boomtimes, well run trade businesses can still make excellent profits by focusing on doing the basics extremely well and having good tax and accounting systems.
The main message for Kiwi tradies when interest rates head up? Rein things in, tighten up and focus on the basics.