The difference between the Global Financial Crisis (GFC) of 2008-2009 and the COVID-19 Crisis of 2020.
The GFC occurred as a result of easy credit in the years leading up to 2008. Property, shares and other commodities increased from the early 2000’s through to 2008, people were borrowing more than they should have and bet that the market was always going to increase. The USA experienced an implosion of mortgage backed securities and subprime loans, the whole world was tangled in these securities. The derivative markets collapsed and it seemed that the everyone lost faith in global markets. In the USA people walked away from their homes and stopped paying debts. The GFC commenced in 2008 and lasted throughout 2009.
Governments all around the world stimulated the economy by using monetary policy (decreasing interest rates) and fiscal policy (increasing the currency in circulation called quantitative easing).
A common saying in the GFC was that if a bank is too big to fail then it had to be bailed out. The property market collapsed in the USA. In Australia our property market also felt a period of decline and stagnation although not as severe as the USA. Australians experienced mortgage stress and many had to sell their homes and investment properties due to job losses and to cover losses in the stock market. Let’s not forget those that leveraged their share investments through borrowing from their home and further leveraging their investments via a margin loan (a certain Financial Services business in Townsville comes to mind). In the GFC the Government left you to weather the storm. Superannuation balances declined, direct shares declined and fund managers failed. In an effort to stimulate the economy the then Australian Prime Minister Kevin Rudd gave most Australians $900 if you paid tax. There were of course other tax incentives that we will not discuss here. It was reported that the Australian Government produced a $100 billion dollar stimulus.
Let’s look at the numbers:
Decline in the Dow Jones from a high of approximately 14,000 points to the low of approximately 6,000 points (57% decline).
Decline in the ASX from a high of approximately 6,600 points to the low of approximately 3,100 points (53% decline November 2007 to March 2009 – 16 months from high to low).
RBA cash rate prior to the GFC 7.25%.
Between 2008 to late 2009 the RBA cash rate decreased to 3.00%.
Home loan interest rates averaged 8-9% variable prior to the GFC and decreased to 5-6% variable post GFC.
THE COVID-19 CRISIS – PANDEMIC
The COVID-19 crisis commenced in March 2020 in Australia as a result of a pandemic and the government closed parts of the economy.
In response to the Pandemic of COVID-19 the Australian Government introduced fiscal measures to prevent a complete collapse.
Prime Minister Scott Morrison has doubled the Newstart allowance from $550 to $1100 per fortnight, paid businesses a $750 job keeper wage to ensure their employees remained gainfully employed.
We have seen 3-6 months repayment holidays with interest to be capitalised and loan terms increased in some cases. Interest only repayments are on offer without the need for a full assessment. Banks have stated that they will make a file note “COVID-19” on your file but claim it will not adversely impact your credit file.
The governments are talking about bailing out everyone and everything and have maintained confidence by guaranteeing loans and deposits.
Governments and Central Banks are throwing everything they have at this one. The Australian government will do whatever it takes to get us through the COVID-19 Pandemic.
Will they succeed or will they fail? We think they will succeed and re-inflate the beast into an inflationary period by 2021/2022. After all we are still in a property cycle (it’s not yet meant to crash).
Let’s look at the numbers:
Decline in the Dow Jones from a high of approximately 29,500 points to an approximate low of 18,500 points in one month 37% decline.
Decline in the ASX from a high of approximately 7,000 to an approximate low of 4,500 points in one month, a decrease of 35%.
Home loan interest rates 2-3% variable
Note: since the GFC the last interest rate increase by the RBA occurred on the 3rd November 2010 where our cash rate was 4.75%. Rates have either been put on hold or decreased ever since this date.
Now for some history regarding the past 40 years:
- 2019 – 2020 COVID-19 economy shutdown due to medical advice (not a credit fuelled collapse)
- 2017-2018 APRA tightening lending for investment, banks limited and stopped accepting applications for investment loans, Sydney and Melbourne property prices crashed
- 2008-2009 GFC caused by easy credit in early 2000’s and a property collapse, subprime loans and derivatives market imploding
- 2001 911 an act of Terrorism
- 2001-2003 Dot Com bust, share markets decline by about 40%
- 1990-1991 the recession we had to have. There was a boom in asset process fuelled by credit in the 80’s. High interest rates and a fall in asset prices ensured loans could not be repaid. The AUD, property and commodity prices declined
- 1987 stock market crash and negative gearing introduced
- 1980-1982 stock market decline of around 40% and high interest rates of 15%
What do we learn from this? We will continue to see booms and busts and the next will be bigger than the last.
Perhaps the next GFC or decline in property may very well occur between 2026-2030.
We believe that a property market crash will not occur this year or next and here is why:
Right now money is cheap and interest rates are declining, governments are handing out pay cheques, people are still willing to buy and are buying (we are still helping people obtain home and investment loans). APRA allowed the Banks to relax their lending policies (although at the time of writing if you are in retail, hospitality and other non-essential occupations you may be declined a loan – this will pass with the economy re-opening) and interest rates are low. Valuers reports are still in line with contract prices, real estate agents have reported a decline in listings (less supply of stock) and homes are selling before auction. No data is suggesting that there is an excess in supply of stock (supply vs demand remains on par). Those still in employment have borrowing capacities that have increased in the past two years due to relaxed lending buffers for serviceability of a loan. The construction industry is still in business, homes are still being constructed and cranes are still assembled with developers buying land and working on high rise developments. Developers can still obtain finance! In the GFC development finance was difficult to obtain and lenders were worried.
Remember our economy is experiencing a slowdown based on medical advice. We believe this is a mid cycle event and not the grand finale. This is not a GFC! A credit fuelled GFC style event will come in this decade and it will be bigger than the last with all of this cheap money around and relaxed lending policies. And as is always the case, people will lose money in shares and property and others will emerge with cheap assets ready for the next boom.
First home buyers can obtain a home loan with as little as a 5% deposit, receive a $15,000 (QLD) grant, and have their lenders mortgage Insurance (LMI) guaranteed by the government. As of March 2020 if they have lost their employment they can have their mortgage put on hold and receive a pay cheque from the government. Never before in our history have we seen anything like this. Get the new home with little deposit, receive a grant and not have to start paying for it until 3-6 months later if you have lost your employment. No need to sell!
If the above doesn’t convince you why this will not be a major GFC property crash event, then perhaps panic and sell everything. If you want to learn more and look for opportunity then get in contact with us.
Are you prepared for your next opportunity? This could mean purchasing a property or refinancing your current loans or consolidating debt to something more suitable. At Forward Thinking Finance we will ensure you have the correct finance structure, that the strategy is of a financial benefit to you and the right product is in place.
Don’t let this year or next go to waste!