Debt fears as new bust looms

The West Australian - - WEST BUSINESS - Ka­rina Bar­ry­more

“Stuff hap­pens” . . . and it will hap­pen again.

Ten years on from the global fi­nan­cial cri­sis, in­vest­ment ex­perts are rais­ing the spec­tre of an­other bust. And they say, in­evitably, there will be an­other one af­ter that.

If there’s one thing we should have learnt from the cri­sis, it’s that such busts are normal.

Al­though there is lit­tle we can do to stop them, there are some tricks of the trade to recog­nise when one may be about to hap­pen and to keep losses to a min­i­mum.

“I sus­pect we are fac­ing into a storm which looks wor­ry­ingly like the GFC — high debt, over­lever­aged house­holds and risks in the bank­ing sys­tem,” Dig­i­tal Fi­nance An­a­lyt­ics prin­ci­pal Martin North says.

“It’s worth re­mem­ber­ing that within six months of the (start of the) crash, the Fed in the US and reg­u­la­tors in Ire­land both de­clared their banks were strong, home prices were not in a bub­ble and there was no need to be con­cerned about the level of house­hold debt.

“They were wrong on ev­ery count. Now take a look at re­cent lo­cal com­ments from our reg­u­la­tors and there is an eerie res­o­nance.”

Mr North says Aus­tralian banks have been us­ing mort­gages to keep grow­ing their bal­ance sheets, re­sult­ing in an over­re­liance on ex­pen­sive short­term money mar­kets, and means they are in­creas­ingly ex­posed to in­ter­na­tional in­ter­est rate rises.

“Bank ex­u­ber­ance (for mort­gages) reached a fever pitch, with lend­ing stan­dards be­ing di­luted and ev­i­dence now re­veal­ing that some home loans were mis-sold and in some cases even fraud was in­volved,” he says.

“The royal com­mis­sion has al­ready called this out.

“Our banks are to­tally re­liant on fund­ing from the fi­nan­cial mar­kets glob­ally, two-thirds of which is on a short-term ba­sis.”

When it comes to prop­erty there are ma­jor im­pli­ca­tions for the mar­ket.

“Mort­gage stress has never been higher in Aus­tralia than it cur­rently is,” Mr North says.

“There is a com­plex set of fac­tors that is driv­ing that — the flat (wages) growth, the costs of liv­ing have risen very strongly and the high debt con­cen­tra­tion that we have in Aus­tralia is a crit­i­cal el­e­ment.”

He says that is an echo of the cir­cum­stances 10 years ago when high debt lev­els brought the global econ­omy to its knees.

Here in Aus­tralia, high debt lev­els are again cre­at­ing prob­lems for many house­holds, Mr North says.

“We’ve got the high­est debt-toin­come ra­tios that we’ve ever had,” he says. “We’ve got more house­holds strug­gling.

“In round num­bers, nearly one mil­lion house­holds now — of the 3.3 mil­lion that are owne­roc­cu­pied by bor­row­ers — are find­ing it very dif­fi­cult just to make those mort­gage re­pay­ments each month.

“It’s never been higher and it looks to me as if that’s go­ing to get worse.”

Mr North notes in­ter­est rates are ris­ing. Three of the four ma­jor banks have in­creased home loan rates in the past three weeks, and a string of smaller lenders and for­eign banks had al­ready lifted their rates.

This comes at a time when in­comes “are com­pressed and the costs of liv­ing are ris­ing”, he says. “We are look­ing at a prop­erty fall — the ques­tion is how se­vere.”

AMP Cap­i­tal chief econ­o­mist Shane Oliver says in­vestors and house­holds should get used to the in­evitabil­ity of eco­nomic cy­cles.

“Stuff hap­pens,” he says. “While af­ter each eco­nomic cri­sis there is a de­sire to make sure it never hap­pens again, his­tory tells us that ma­nias, pan­ics and crashes are part and par­cel of the process.

“The big ones, typ­i­cally, come along ev­ery 10 years or so. It’s in­evitable that they will hap­pen again as each gen­er­a­tion for­gets and must re­learn the lessons of the past through an­other bub­ble.”

That said, Dr Oliver be­lieves the next bust is still some time away.

But in­vestors should still heed the key lessons from pre­vi­ous crises to help min­imise the im­pact of the next one, he says. His key lessons are: There is al­ways a cy­cle. Long pe­ri­ods of good growth, low in­fla­tion and high re­turns are in­vari­ably fol­lowed by some­thing go­ing wrong.

Each boom-bust cy­cle is dif­fer­ent, but as­set val­ues are usu­ally pushed to ex­tremes be­fore ev­ery fall.

High re­turns come with high risk.

Be scep­ti­cal about in­vest­ment prod­ucts that are hard to un­der­stand and over-en­gi­neered, even if they have a triple-A credit rat­ing.

Avoid too much gear­ing, or debt, es­pe­cially mar­gin loans that may force you to sell when you should be buy­ing.

Don’t sweat the small de­ci­sions, such as whether re­sources shares are a bet­ter op­tion than bank shares, or which fund man­ager to use.

It’s the mix of as­sets such as shares, bonds, cash and prop­erty that mat­ters most.

When it comes to su­per­an­nu­a­tion, Kirby Rap­pell, chief ex­ec­u­tive of re­search house Su­perRat­ings, says the av­er­age balanced su­per fund fell 24 per cent as a re­sult of the global fi­nan­cial cri­sis, while growth funds tum­bled 31 per cent.

But within four years, most funds had re­cov­ered their losses and to­day, ev­ery $100,000 in­vested be­fore the cri­sis has grown on av­er­age to $168,000.

“For younger mem­bers, un­der 40, the GFC didn’t have any real im­pact,” Mr Rap­pell says.

“This was dif­fer­ent for re­tirees — the mar­ket falls di­rectly im­pacted daily life or de­layed re­tire­ment.”

Pic­ture: AP

Traders in New York de­spair as the stock­mar­ket falls on Septem­ber 16, 2008.

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