Ill wind not as bad as it seems
An email from a Christchurch reader has got me thinking. “In any game it is either a win, loss or a draw,” he writes. “Right now there are plenty of losers, nationally and globally — individuals, institutions, banks, organizations, even one or two countries. So who are the winners?”
My first reaction was, “Who says the economy is a game?” But in many ways it is. For everyone who sells something, there must be a buyer. If the price is higher than usual, the seller wins. If it’s lower than usual, the buyer wins.
The same applies to interest rates — which are just the price of money. And, looking at the current situation, that’s a good place to start. While people with bank deposits are “losers” these days, borrowers would generally qualify as winners.
Those with fixed rate mortgages may feel like losers because they can’t benefit from the current low rates, unless they pay a penalty to break their mortgage term. But back when they signed up for their fixed mortgage they must have thought it was a pretty good deal — with the rate typically being lower than on a floating mortgage. And their turn to get a lower rate will probably come, when their mortgage term ends.
If a child is happy with an ice cream, but later complains because he sees someone with a bigger one, most of us wouldn’t have much sympathy for the kid — especially if he will get a bigger ice cream tomorrow.
What complicates it all for many people with mortgages — fixed or floating — is that the value of their house has been falling, which makes them feel like losers. But are they?
If you’ve borrowed against the equity in your house so you can invest in other property or a business, and that investment hasn’t gone well, you’re not going to happily watch your equity decrease — perhaps to the point that you owe more than you own.
But if you can hang in there, things may well come right. And for many other home owners, the declining value of their house doesn’t make much difference if they don’t move — or if they buy and sell in the same down market.
There are, of course, some clear winners from falling house prices — buyers of first homes. Cheaper mortgages and cheaper houses, perhaps combined with KiwiSaver first home buyer incentives, are putting them in a much stronger position.
It’s similar for investors in shares or property. Those who have watched values decline are not losers unless they have to sell. I hope that many will stick with their investments, which will probably regain what they lost and grow further.
And the people who buy shares or property at what turns out to be the bottom of the downturn will also emerge as winners. But that’s not obvious yet. It always takes a while to ascertain just when the bottom was.
So where are we? Nobody would claim that big economic downturns are easy. While it can be good for an economy to be shaken up — to get rid of the inefficient and unnecessary — widespread uncertainty can lead to some good businesses also being wiped out.
What’s more, the pain of a recession is not felt evenly. People who are made redundant have too little work, while the experts at cleaning up the mess when businesses die have too much.
But when you look at the big picture, there are probably not as many big losers as there might seem. And, as my mother used to say, “It’s an ill wind that blows nobody any good.”
Mary Holm is a freelance journalist, a director of Financial Services Complaints Ltd (FSCL), a seminar presenter and a bestselling author on personal finance. From 2011 to 2019 she was a founding director of the Financial Markets Authority. Her opinions are personal, and do not reflect the position of any organisation in which she holds office. Mary’s advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following it.