Debt fears as new bust looms
“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.”
Traders in New York despair as the stockmarket falls on September 16, 2008.