To get a better sense of the future, it’s always wise to turn to the past.
And despite the uncharted waters that Covid has landed us in for the most part of 2020, if we look back to decades gone by, an economic downturn caused by a global crisis is by no means a unique event.
Regardless of how headlines sound the alarm of a ‘great lockdown recession’, we’ve been here before; rising unemployment rates, government wage subsidies, rock bottom consumer confidence – they’re all outcomes of extreme economic fluctuations, and were part of the story in our not-too long ago Global Financial Crisis of 2007.
History has shown us that storms don’t last forever… but how long before we can expect this one to pass, and for the market to bounce back?
We can only speculate by looking at our track record of recessions. While the GFC and Covid downturn are different in character (the first being a crisis of financial markets and property prices, the latter being a health pandemic), a few parallels can be drawn.
Both saw a drop in business activity, followed by the Australian government introducing stimulus measures and cash hand-outs to jump-start the economy; and both led to an all-time low in consumer confidence, resulting in an ‘artificial’ constraint in the real estate market – whereby people are financially ready to buy and sell, but too afraid to step into the market. And when people don’t move and the number of property transactions declines, home values often take a hit (which we saw in the GFC).
However this might not be the case with Covid in Australia, and it’s likely the government’s support packages that are to thank for this. The measures are providing extra cash flow for numerous Australian households, meaning that less people will be forced to sell – and keeping real estate prices relatively stable.
By all means, we’re not out of the woods yet, and it’s still too early to say when and how the Australian market will return to a healthy balance with many places still in lockdown. But if there’s one thing that we did learn from the GFC, the 1990s recession and even the Great Depression of the 30s, it’s that beating a sluggish downturn is entirely possible with the right kind of spending – spending to reduce household debt such as mortgages, credit cards or personal loans, that is – as opposed to shiny new purchases.
Of course, this begs the question: how can you afford to spend on lower income? While financial strain is a difficult cycle to get out of, even in the midst of a recession, it’s entirely possible to grow and protect personal wealth by looking to additional sources of income. The world still needs to turn – and where some jobs have dissolved to nothing, demand for others rises. This was the case with counsellor and physician lines of work during the GFC, and it’s the case with the increased demand for remote work and side-hustles (including unskilled labor) during Covid such as delivery services and supporting people in isolation – just ask Airtasker.
A little belt tightening is a completely natural response to a recession too, and it’s worth taking this a step further by setting a realistic budget, reducing any unnecessary expenses and putting some extra cash aside into an emergency fund. All of these could be the key to ‘recession-proofing’ your finances according to Jim Chappelow and other economists, who recommend jumping on any new opportunity that presents itself as the market moves on.
With every recession comes panic and stress, but the best strategy that could save you in the end is to focus on what’s within your control.
If history is any guide, a financial recession is nothing to fear; live within your means, diversify your streams of income and think long-term goals, outside the economic cycle. After all, recessions are mostly fuelled by how we think and respond to the economy – rather than the economy itself!
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