Housing investors could have nothing to fear and a lot to gain if there’s another Global Financial Crisis (GFC), and it’s not for the reasons you might expect.
BY JOHN LINDEMAN
Property experts are busily assuring us that we have nothing to fear from the current financial crises gripping much of the Western world. They tell us:
- Housing responds to different dynamics than the financial market.
- It’s nowhere near as volatile as other forms of investment.
- Another GFC will send investors scurrying to the relative safety of housing.
These reasons are all sound, but they’re not the reason why a second financial crisis could actually be beneficial to our housing market. The answer lies in Europe, with the problems facing countries on the European rim such as Ireland, Portugal, Spain, Italy and Greece.
The days of funding high lifestyles from public debt are over
The financial crisis these countries find themselves in comes from years of providing generous subsidies, incentives, pensions and payouts to farmers, companies and individuals, funded from the public purse. This largesse enabled the politicians of these countries to provide their residents with the same high standards of living as their larger and wealthier European Union (EU) cousins in France and Germany. As we have already witnessed in Iceland, Ireland and Greece, and will soon see in Spain and Italy, the days of relying on growing public debt to fund private lifestyles in the Eurozone are well and truly over.
Smaller EU members faced with a sovereign debt default when the piper finally came to play his ‘pay up’ tune threw up their hands in horror and were offered assistance by the larger Eurozone countries. As a result, the accumulated debt is not being paid off, just being passed up the pecking order. This is the stuff of looming disaster – banks will not lend money to high-risk EU countries such as Italy, Spain and France, and investors will shun their bonds, yet they simply can’t default, because there’s no one big enough to help them. In effect, they are too big to fail, but also too big to bail.
Eurozone countries are faced with unpalatable options
When governments have to manage a debt they can’t repay, they have only four choices – increase taxes, cut expenditure, sell assets or print lots of money. The first three remedies lead to public unrest – even riots – and result in governments getting toppled. This is why the USA has chosen the fourth option of furiously printing money to inflate itself out of debt. It is also why another GFC, if it occurs, will hit Europe much harder than the USA.
When the smaller countries joined the Eurozone, they traded in their Drachmas, Escudos and Pesetas for Euros. They lost the ability to print the money they now need to buy their way out of trouble. The only option left for the debt-ridden nations of the Eurozone is extreme belt tightening. It’ ll get worse before it gets better and could result in the breakup of the entire EU system, with political turmoil, severe depression and high unemployment in the worst hit countries, and it could happen very soon.
When the going gets tough, people leave
Why is this good for our housing market? Because people have an option not available to governments to solve such a crisis – they can leave. It’s happened before and it will happen again, and if the situation deteriorates in Europe as it probably will, we may once again throw open our nation’s doors to a new wave of European migration.
Thousands of disgruntled Spaniards, Irish, Portuguese, Italians and Greeks will seek their fortunes here. Not only is our economy insulated from Eurozone woes by being increasingly reliant on Asian economic fortunes, the arrival of a new wave of migrants will generate economic growth and just as our history shows, the housing market will boom for investors in the areas where they choose to settle.
What do you think? Will a second GFC be good for property investors in Australia?
John Lindeman is chief property consultant at innovative housing market analysts, Property Power Partners. For more information visit www.understandproperty.com.au