The Financial Cliff

It’s early Thursday morning and I’m sitting in my favourite café.

And every time I look up from my yellow writing pad, I notice a lady looking my way.

A few minutes later she’s standing at my table.

“Hi, are you Suncow?” 

“Yes”

“I’ve been reading your moowsletters, can I ask you a question please?”

“Sure, have a seat”

“Do you think we’ll get four more interest rate rises this year?” she asks nervously

“Yes”

“And do you agree with all this talk we’ll fall off a financial cliff?”

“Yes”

She slumps and the colour drains out of her face faster than a burst water pipe.

The financial cliff she’s referring to are the 800,000 property loans that have to be refinanced up from 2% to 5-7%, starting now.

Here’s an example…

Last week, a client sent me a text to say a friend had just refinanced his $2.5m home loan up from 1.99% to 4.79%.

That’s an extra $75,000 pa in interest on top of his current interest payments.

Ouch!

“How bad do you think it will get?” she asks clutching her handbag

“Most people will be ok and the rest will be in trouble”

“WHO will be in trouble?” she asks eyes wide open

“The first group will be those people who borrowed too much or lied about their income on their loan applications.”

“The second group will be those businesses who were on the brink three years ago but were saved by the rivers of pandemic stimuli”

“And the third group could be those people who believed the Reserve Bank when they said rates wouldn’t go up until 2024.”

“That’s ME!” she screeches

Before this lady has a nervous breakdown, we do a few quick calcs and the good news is she’ll be ok. It’s going to be tight for a while but she’ll pull through.

There’s no denying the RBA Governor, Phillip Lowe, should be impeached for lulling borrowers into a false sense of security telling them interest rates wouldn’t go up until 2024. It was reckless and he should go.

But, it takes two to tango…

What did borrowers think would happen after 2024 knowing they’d taken out a 25-year loan?

Did they naively expect rates to stay at record lows forever?

Why didn’t they stress test their loans to see what would happen if rates went up at any stage?

It’s like the farmer who borrows too much expecting he’ll have a bumper crop every year and never get hit by drought. It’s fanciful.

This financial cliff was visible two years ago but most people wanted to look the other way.

And history shows we repeat the same pattern. every. single. time…

‘Good times make weak people, and weak people make bad times. 

And bad times make strong people, and strong people make good times’

It’s an ancient old cycle.

The next period will seem challenging only because the last three years were economically easy for most people.

Comparisons cause more pain than we realise.

Enjoy your coffee!

Adam

Back paddock – things are never as good as they seem, nor are they as bad as they seem, instead they’re somewhere in between – Rod Macqueen, World Cup Wallabies Coach (1998-2001)

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