Anyone would think human beings have short-term memory loss. Less than a decade ago, the world transitioned into a new fiscal era, ushered in on the back of a crippling global financial crisis that meant the end for some, and a new beginning for others.
Stepping aside as the recognised world superpower due to a national banking crisis of mammoth proportions, the US was overtaken by China, and an entirely new economic landscape arose like the proverbial Phoenix from the ashes.
That crisis was borne from a financial services sector gone mad. Credit was being thrown at homebuyers like candy at a kid’s birthday party, seemingly without any concern as to how people would repay their debts down the track.
Lending policies were so lax in America just prior to the monumental fall from grace, you could virtually list your employer as Vandalay Industries on your loan application and assessors would rubber stamp that thing regardless.
In response to what Australia watched happen – largely from the sidelines because we didn’t have quite such the “balls up” of a banking sector – lenders here tightened their finance guidelines virtually overnight post-GFC, with the government taking significant steps to further protect the sector.
Back to the future
Fast-forward to present times, and some are suggesting we’re on the verge of yet another catastrophic shake-up in the banking world that could have dire consequences for more than just investors.
This time around however, the potential problem is largely being created by rampant global investment activity. Much of which is being funneled into major world housing markets.
Ongoing low interest rates and an injection of cashflow from the central banks and governments into the global economy has meant good tidings for owners of assets – both shares and property.
This has translated into a positive flow on into Superannuation coffers and other areas of industry, such as construction, services and retail.
Add sustained, strong population growth, driven by immigration and the unwavering Chinese fascination with Aussie real estate, and you have yourself some serious housing market buoyancy.
“Buy and hold” investors have undeniably reaped the most benefit, with both share and property portfolios enjoying healthy capital growth, as select inner city housing markets experience exponential value gains and in turn, bolster the banks’ dividends.
And the combination of near-zero global interest rates and major economies still chugging on quite nicely (especially those who are our closest geographic neighbours), has meant pretty decent corporate profits too.
So what’s the problem then?
Well, if this global, low interest rate environment continued indefinitely, it may not be that much of an issue. People could keep borrowing against the growing equity in their home and/or investment portfolio, and the wheels would keep on turning.
But we know that’s not going to happen. In fact, even as our own Reserve Bank continues to sit on its hands and keep our official cash rate at an all time low of 1.50%, other central banks around the world are taking action.
It would seem that this unique era of global low interest rates is finally coming to an end.
The US Fed Reserve has started to slowly and tentatively raise its official rate. Agonizingly slow in fact, taking them two years to creep back up to a point that’s still below our own Reserve Bank’s official 1.50%.
While no one is overly concerned with the goings on in the European or UK banking sector right now, there’s been noise from both that they’ll soon follow America’s lead, raising rates at different times and paces according to their own economic tidings.
Although we no longer have so much “funny money” doing the rounds, as was the case back in 2008, now we have housing markets and banking sectors largely built on a whole world of debt – government, banking, company and property investment related debt to be exact.
The consequences of a world economic collapse now could be just as devastating as it was back then.
Fortunately, most analysts believe the chances of another GFC are reasonably slim right now. Although we have perhaps slipped into a state of somewhat blissful ignorance when it comes to household debt levels proportionate to these current low interest rates, there are still more safeguards in place than there were back then.
Consider how much pressure industry regulators began placing on the banks when it became apparent they were intent on profiting from the property machine, and perhaps starting to lose sight of ‘safe zones’ for housing debt levels.
The big risk in all of this is that the central banks are so overly cautious in lifting rates, that they could find themselves suddenly having to play catch up all at once.
As usual, the outcome will be dependent on daily occurrences and happenings in the world. We live in highly volatile and uncertain times – politically, socially and economically speaking, where the only thing you can control is your own response to investment markets and how you choose to evolve your portfolio.
Keep clear, focus on your strategy and goals and you’ll be far more likely to weather any future storms that might be on the horizon.