Before moving to Australia five years ago, I used to live in Marbella in southern Spain. It’s a place I still visit every year since my family lives there.
Marbella is a white coastal town about 600km south from Spain’s capital, Madrid.
The former fishing village has completely changed since the 1960s, when hordes of northern European tourists starved for sun started visiting each year.
That’s one of Marbella’s appeals, the weather.
In fact, that’s a hook many hotels in the area use to their advantage to attract tourists. They guaranteed your money back if it rained at all during your holidays.
With around 320 days of sun, and little or no rain between the months of May to October, that’s a safe bet.
At one point Marbella was so popular that it became the party spot for celebrities and royalty. A place for regular yacht and Ferrari sightings.
By the early 2000s, the area — and Spain — were booming. An increase in foreigners purchasing property, low interest rates, and excess credit combined to push up prices. Spain was being built at a rapid pace to cope with demand.
It was a frenzy.
You can’t lose with property, they said.
In fact, it’s something I believed then too. Over the years my family had made quite a bit of money on the side by buying run-down properties in good locations, fixing them up, living in them, and then selling them.
But what they didn’t say was that the rules of the game had changed.
It wasn’t higher salaries and growth pushing the property frenzy, but cheap and widely available debt.
By the time 2008 rolled around, everything came crashing down. Unemployment soared and many could not pay their rent or their mortgages.
Credit tightened, which meant there were fewer buyers. And anyway, with properties losing 45% of their value, many who bought at the end of the run had to sell well below the price they had bought for.
Spending slowed and many businesses failed. With the credit slowdown, only a handful could access loans to start up new businesses or continue operating.
It was a brutal aftermath.
Rule of property are changing…
The rules of the game changed for property in 2008…and I think they are once again changing today with COVID-19.
You are already starting to see some signs that things aren’t right. They haven’t been right for a while, particularly in property.
Property has increased in Australia at a higher pace than salaries for the last few years. Investors were making gains from prices climbing higher at a fast pace.
That’s done now.
To keep property going you need two main things: employment and easy credit.
With COVID-19, and queues at Centrelink out the door, unemployment is already set to hit at least 10%. Less people will be able to afford property.
And as for credit, some banks are already tightening. The Australian Financial Review reported yesterday:
‘ING, the nation’s fifth-largest residential mortgage lender, has effectively shut the door on self-employed borrowers involved with industries hit by COVID-19, such as airlines, tourism, hospitality and retail.
‘The bank, which has a $50 billion residential mortgage book, also warns that applications for owner-occupied loans from casual employees or contractors will not be considered. […]
‘Other lenders including Macquarie Bank, Bluebay Home Loans, Auswide Bank and Gateway Bank are also tightening their lending in response to the pandemic downturn.
‘Macquarie Bank is introducing new credit controls for borrowers from Thursday.
‘Loans greater than 70 per cent the maximum debt will be capped at six-times income where the loan-to-value ratio is greater than 70 per cent of the property’s value. In addition, equity release or cash outs, which is borrowing against the value of the property, are banned for debt consolidation loans. […]
‘Last week, La Trobe Financial said it will cancel some residential and commercial real estate loans it had approved, partly in reaction to government-enforced rent holidays and moratoriums on evictions in response to the coronavirus.
‘The Melbourne-based national lender has said it is reviewing its existing pipeline of credit applications, including pre-settlement loans “that had been previously approved”.’
It’s likely we see more of this closing of the credit taps to reduce risk.
With a complete shutdown of the economy though, 2008 could look like child’s play compared to today.
Of course, there is no knowing how much money central banks will throw at this to keep things going.
But my point is, the rule book changed long ago. And now, it’s changing again.
I think the world could look very different when we get out on the other side.
Stay tuned for more on this on Friday.
PS: In a brand-new report titled ‘The Looming Aussie Recession and How to Survive It’, Nick Hubble reveals why a recession in Australia is inevitable and three steps to recession-proof your wealth. Click here to receive your free report.