If you’re like most Australians you’re probably confused and a little concerned about what’s happening in our financial markets and how it’s going to affect you and your investments.
Since the US government was downgraded from a triple-A rating to AA+, media commentators have been working themselves into a frenzy about what’s ahead for Australia. One minute you are hearing about higher interest rates, the next they’re going to be slashed. Share markets both locally and around the world have wiped billions and billions of dollars off people’s superannuation and the Aussie dollar has fallen significantly from its record highs.
As a property investor you are no doubt asking: “What does this mean for my property investments?”
The fact is we’re in uncharted waters, so I don’t have all the answers. But let’s step back a bit and look at things realistically with a simple Q&A.
What happened and how did we get ourselves into this mess?
Ratings agency Standard & Poor’s decision to lower the US credit rating from AAA to AA+, with a negative outlook, essentially confirmed what investors already knew – there’s a very small but increased risk the US government won’t be able to meet repayments on its debt of US Treasury bonds in a timely manner.
The first ever credit rating downgrade for the world’s largest economy had been foreshadowed by S&P, which said it was more concerned with the ability of US politicians to reach an agreement to stabilise the nation’s growing debt burden, than an actual double dip recession and was a welcome wake-up call for squabbling US politicians.
Of course the psychological impact on investors was devastating and share markets around the world plunged, wiping billions and billions of dollars off people’s retirement funds.
In essence, all of this has come about because the US and various European countries exhibited poor economic management and took on too much debt.
How is this different to the GFC?
The big difference this time ’round is that it’s not mums and dads or banks that are going broke. This time it’s countries that can’t pay their debts, so it’s likely that the subprime crisis will be completely dwarfed by the sovereign debt crisis that is now unraveling.
How are the USA and European nations going to get themselves out of trouble?
Historically, countries would either write off their debt (probably unacceptable today), renegotiate their debt (that’s what’s happening in Europe), or repay their debt with currency that is worthless by printing money and creating inflation.
What does this mean for world economic growth?
The IMF projects that the world economy will advance at a healthy 4-5% per annum this year and next because the so-called G7 economies—the US, UK, Germany, France, Japan, Italy and Canada—only account for about 30% of global economic growth.
The higher-growth emerging and developing countries account for about 60% of the world’s economy and this is important as around 30-40% of Australia’s exports go to two of these countries alone: China and India.
Is this a new financial era?
Yes, it is a sign that the global centre of economic gravity is shifting away from the North Atlantic countries towards Asia.
Luckily Australia is situated in this region and possesses the vital ingredients these high-powered nations require. As China and India move through their stages of industrialisation and urbanisation they will require our natural resources, like iron ore, coal and natural gas, for steel and energy.
How is Australia’s economy performing?
The Global Financial Crisis came as a surprise to most of the world, but since then, every country has been preparing to handle similar situations.
While Australia went into the GFC with a budget surplus, allowing it to spend up big on incentive packages, we’re now in deficit; but our economy is healthy and still the envy of the developed world as we have a lot less debt than most other countries.
We’re at virtually full-employment and wages and disposable household incomes are rising. As a result our household budgets are healthy as many of us continue to stash our cash rather than spend it.
Also our interest rates are high enough to be reduced 2 or 3 per cent if needed to prevent a recession if things get tough.
What does this mean for property?
In the past, every time there has been a stock market crash investors lost confidence in paper assets and moved their money into tangible assets such as properties or gold and silver.
The bottom line is that after an initial lull in activity, it is common to see several years of good property performance after a stock market correction.
In the short term I see the luxury end of our property markets suffering, but the news is better for properties in the middle and lower price brackets.
How did property perform after previous stock market collapses?
Compared to shares, property performed very well.
You just have to look back a few years to the correction after the GFC when local share prices plummeted 50 per cent, but the peak-to-trough fall in Australian home values was just 3-4 per cent.
It was much the same in 1987 when the share market crashed and property values languished for a while before a property boom that created fortunes.
And let’s not forget the property boom we experienced in 2001 – 2003 after the dot.com share boom collapsed into what became known as the “tech-wreck” in 2001.
What’s going to happen to interest rates?
There are so many factors at play, but it is likely that rates will come down. There is already evidence of this in the markets and a number of banks have lowered their long term fixed interest rates.
Of course if we end up with massive inflation, partly because we’re importing it through a falling Australian dollar, then the RBA may need to raise rates. But I think they’ll turn a blind eye to slight increases in inflation over the next few months.
The reality is that these problems will not go away quickly and we are entering a new era in the financial markets.
After 3 years of uncertainty the average Australian has lost confidence in the share market and Baby Boomers in particular will be hurting, as their retirement savings have once again been decimated.
After the initial shell shock wears off, many Australians will want to manage their own financial affairs and I see more money going into Self Self-Managed Super Funds to purchase properties.
Here’s my recommendation….this is not a time to panic or make rash emotional decisions. It is a time to learn from history.
Look back at what happened during and post the GFC, during the tech-wreck of 2001, after the Asian stock market crisis of the mid 1990’s and the stock market crash of 1987.
There’s no denying that things are probably going to get worse before they get better.
Don’t get me wrong, I’m not suggesting this because I’m a fearful person or because I think negatively…I’m not and I don’t. I understand and firmly believe that all progress comes from change. I believe destruction allows for creation – oftentimes of something bigger and better (if I didn’t subscribe to this theory I wouldn’t be a very good property developer would I?).
It’s part of the economic cycle. This is a time for cleaning up the excesses of the past and getting our financial houses in order to move on to the next stage of the economic cycle, which is the recovery phase.
I’ve found that when things are bad people believe they’re going to be bad forever and when things are good, people forget the bad times ever existed and think that things are going to remain good forever.
Neither case is true!
Remember that when things are bad, they’re never as bad as they seem and when they’re good, they’re never as good as they seem. And in reality, it’s primarily human nature that dictates economic and/or market booms and busts.
What this means is that to protect your assets and be a successful property investor over the next few years, it is very likely you are going to need to take a different approach to the one you took over the last few years.
Some readers will definitely need to do different things to protect their current property portfolio.
And I’ll be explaining exactly what I’m doing about it at our How to prosper in a flat or falling property market 1-day training seminars.
I’ll keep you up to date with how to take advantage of the changes happening in our property markets in future updates, but it is probably appropriate to remind you that in changing times like we are experiencing, no one can help you quite like the independent property investment strategists at Metropole.
Remember the multi award winning team of property investment strategists at Metropole have no properties to sell, so their advice is independent and unbiased. If you want to find out a bit more about what is happening in your local market and what our research suggests is in store for us, join us at a free property briefing in Melbourne, Sydney and Brisbane or with our associates in Perth. Just click on this link to find out more and reserve your place.
As so much is happening in property nowadays I’ll keep you updated 2 or 3 times a week in my blog – just click Michael’s blog in the top menu items on this page and subscribe to it – that’s a different subscription to my regular newsletter – it gives you my short daily updates.
Subscribe & don’t miss a single episode of Michael Yardney’s podcast
Hear Michael & a select panel of guest experts discuss property investment, success & money related topics. Subscribe now, whether you're on an Apple or Android handset.
Need help listening to Michael Yardney’s podcast from your phone or tablet?
We have created easy to follow instructions for you whether you're on iPhone / iPad or an Android device.
Prefer to subscribe via email?
Join Michael Yardney's inner circle of daily subscribers and get into the head of Australia's best property investment advisor and a wide team of leading property researchers and commentators.