What Does The GFD Mean For Property?
In 2008 and 2009, we found ourselves in a global financial crisis. We are now coming to a point where a GFD is imminent.
What do I mean by GFD?
I mean a global financial depression – one that will make the GFC look like a minor glitch.
What does this mean for property? Before we look at this, let’s go back to 1971 when the whole problem began.
When the US dollar became fiat.
In 1971, the gold standard was removed from the US Dollar. While it was previously pegged against the solid asset of gold, the dollar was now backed by nothing – just the shared understanding that it had value.
At that time, the US Dollar became the base currency for the whole world to trade in.
Since the currency was fiat, the Central Bank could essentially print as much money as it wanted. But, when central banks create too much money too quickly, the currency loses value.
If you go back and study currencies from all over the world, you will find that most currency has had a lifespan of forty or so years before it became hyperinflated. This is when inflation happens too quickly and money loses value at an alarming pace.
There have been loads of currencies that have become hyperinflated throughout history, but never before has this happened on a global scale.
The liquidity squeeze.
Countries all over the world are feeling the pinch at the moment – the credit pinch that is.
The world is awash with fiat currencies that are leveraged on a record amount of debt.
We’ve gone through a decade of quantitative easing, where central banks around the world have printed a lot of money to stop the economy from dying.
In turn, this has caused a new drama whereby if the central banks raise interest rates the economy will collapse. Now the whole world is hooked on low interest rates to the point where our economies need them to survive.
What to do about rates?
If rates go up, it will affect the whole economy. Most companies out there are burning through money like incinerators. Governments, businesses and individuals are leveraged on a whole lot of debt.
So, it wouldn’t just be those with home loans who would be affected by rising interest rates. It would be the whole economy.
What are the options for policy makers?
- They could raise rates and watch the whole financial system die.
- They could keep them low and let inflation become higher.
- They could lower them even more – which would make the whole problem even worse.
Whichever way we turn we are stuck. And this is a problem faced by the global economy, not just ours.
Our whole system is based on an environment of cheap credit. This will inevitably cause the system to collapse.
So, hyperinflation seems probable if policy makers want to keep the economy alive.
What does this mean for Australian property?
Luckily for us, we have some of the highest interest rates out there.
We also have a supply and demand issue.
Our economy is centred around property at the moment. So, if the construction and infrastructure boom stops this will affect the economy. Since we still have plenty of demand, property prices are likely to stay strong.
Short term effects have created a buyers’ market.
Since APRA has done the work of a rates increase by making it harder to obtain finance, many buyers have done become locked out of the market.
This is bad news for sellers but great news for those who are in a position to buy.
While prices have inevitably begun to drop, they are likely to go up again after a while. It is too hard to say when, but as the GFC showed us, Australian property is generally seen as a safe asset.
What happened after the GFC?
When rates were lowered after the GFC, Australians put a lot of money into property. When stimulus packages such as lower rates and relaxed lending practices are offered to a cash strapped public, property tends to benefit. Most people think of property as a more achievable and safer asset than shares or other investments.
Policy makers have been keen to clean up liquidity and slow down price growth. As a result, the global market is going through a liquidity squeeze. When this plays out it is likely there will be a stimulus to boost spending and get the economy going again.
Since the economy is centred on property and there is a lot of demand from buyers, it is likely that people will put their money into property. This will push up prices again.
Don’t be scared – be prepared.
Now it is more important than ever to arm yourself with knowledge about the global economy. You need to be prepared to make informed decisions and take action when a good deal presents itself.
I quit my job during the GFC – at a time when others were worried about job security. I could only do this because I had spent the years leading up to this (and during it) acquiring properties.
When the stimulus period came, increased buyer demand drove up prices and the Sydney property boom occurred. By taking action leading up to the GFC, I ended up miles ahead of most others. If I didn’t already have twenty or so properties when the market doubled, I wouldn’t have reached financial freedom so quickly.
In other words, it pays to educate yourself, prepare yourself and be able to take action quickly.
It also pays to be conservative, have a savings buffer and a good team around you. Having a financial advisor who truly understands the global economy at large is indispensable.
Get ready for a time like no other before it.
Whereas rising rates have impacted the market in the past, we are now entering new territory.
Instead of people losing their homes because they can’t afford higher repayments, now people can’t buy a home in the first place because they can’t get a loan. Or, they can’t save up a deposit fast enough in a hyperinflated environment.
While many won’t be able to buy their dream homes, it will still be possible to get into the market. Saving for a deposit on a $200,000 property in a good growth area isn’t as impossible as saving a $100,000 deposit on a $1 million house while paying LMI on top.
It is important to have a buffer. There are alternative investment vehicles out there that may help to raise capital – but remember that knowledge is power. Due diligence is always an essential part of successful investing.
I am not offering financial advice here – just presenting my view of the economy. If you would like to find out more, there are financial advisors who can look at your situation to help you find the best path forward.