Most pieces on here are obviously mortgage related but today I wanted to flesh out all of what’s happened so far and discuss a bit about where this entire coronavirus situation looks to be heading. This is not just for everyone out there reading this, but myself as well to bring together thoughts and predictions.
Obviously straight off the bat I’d like to emphasis that I’m not a financial adviser and that none of what follows should be considered financial advice. These are my opinions and as such, please make sure you make your own decisions and consult a qualified financial adviser if you are making investment choices.
Where We Are
So let’s start by getting a feel for where we are exactly.
- Equity markets like Australian or American shares have dropped around 30%+ since their highs in Feb. For a rough reference these types of markets dropped around 50% over 3-4 months during the GFC
- Coronavirus has especially hit hard in industries like restaurants, casino’s, hospitality, hotels, airlines, cruise ships and so on where they’re seeing a huge drop in revenue with all the lock downs coming into play more and more
- Governments around the world are slashing interest rates to essentially 0% and printing money like there’s no tomorrow (also called quantitative easing or QE)
- Governments and/or banks are also giving out 0% interest loans or suspending loan repayments (mortgages included) to businesses so they can stay afloat during these rough times
- Many of the coronavirus affected industries are calling out for more government help and/or bail outs essentially
0% Interest Loans Aren’t Enough
Most of the industries affected unfortunately have some of the lowest profit margins out there. Restaurants run on 3-5%, hotels are a little better around 12%, airlines are around 9% and apparently small businesses are about 7%.
Why is this important you might ask? Well imagine you’re a restaurant owner at a Shopping Centre or in the city somewhere. Each month your business brings in $100K in revenue. Great! However you have a profit margin of 5%. So of that $100K, only $5K is profit, the other $95K goes to paying for expenses like your staff, rent, power etc.
With the virus around and everyone in lock down your revenue drops hugely. Say you only get $15K in revenue for the month. Unfortunately you still have to pay that $95K in expenses… so now you’re down $80K ($15K-$95K = -$80K).
But wait! The government or bank can offer you a loan at 0% for as much money as you want in these trying times. Thank god, now you won’t go out of business. So you take the loan for $80K, pay your expenses for that month.
The thing is, this virus is probably going to need a few months to really run its course and have everyone return to BAU. Let’s say an optimistic 3 months. So now you have 3 x $80K loans or $240K in debt at 0% and your business is magically back to 100% normal operations again.
Now you’re making that sweet $5K in profits per month once again… only this time you have a $240K loan to pay off! Even if it’s at 0% (a literal free loan!) it’s still going to take you 48 months or 4 years of committing all your profit towards it just to get back to where you started from before this whole virus thing started.
This is the abysmal situation all these low profit margin, coronavirus affected industries and businesses are faced with. What’s the answer? Well cut expenses of course! What’s the biggest expense and the one you’re likely not using at all while your business has 85% less business? Your employees of course.
A Cascade Of Garbage
The initial hit of the share market crashing spectacularly over the past few weeks seems like it’s going to be just the entree. After that we’re going to see the businesses that have been operating on a knifes edge go under and likely call out for government help/bail outs
This wave has already started along with the increased firing of employees from these industries. While not the most perfect statistic, Google Trends paints a telling picture on the 4x jump in searches by Australians for “Unemployment Benefits” over the last few days.
As more and more months pass, more pressure will be placed on these businesses requiring more drastic cost cutting measures (see firing employees above).
This then has the very real possibility of – together with the country and/or world going into a recession – further depressing the general economy. This spooks people, they hoard / save their money as it’s “a bad time right now” which further reduces businesses revenue feeding the cycle on and on.
Coronavirus affected industries like retail, restaurants, airlines, casinos and so on employ around 20% of the Australian workforce. If these industries collectively let go half of their people over the next few months that would sky rocket unemployment from it’s current ~5% to upwards of 10-15%. This would be highly likely to send Australia into its first recession in 30 years and weigh down the entire economy for 1-2 years or more.
Add to this the huge numbers of home owners that have extremely high amount of mortgage debt (some with just one property, others with multiple) and this other deck of cards could also start to wobble around a bit. The more people that loose their job, the more home loan defaults happen.
The more defaults that happen, the more homes that come onto the market at “must sell” prices, lowering the general market price for all homes. These multiple different spirals can re-enforce one another and spit ball into hugely bad things which I sincerely hope doesn’t happen.
On the more optimistic side, Australia is showing relatively few coronavirus numbers, for now. As a nation we mostly seem to be respectful and want to help flatten the curve and save lives too which is fantastic and will certainly help. Our medical system is up there with the best and the government even seems to be taking the advice from scientists. If only they could do such a thing for Climate Change too…
If we can do it Wuhan style and smash out the virus in a few months we can start everything back up and work on repairing the damage that was caused. China has already begun starting back up so there is a clear path at least to getting back to normal.
As explained above, even in this best case scenario restaurants, casinos, hotels etc are all going to be hit way harder and will likely take 2-5 years to fully recover. But they’ll survive which is the more important thing. As China spools back up it will also help our own industries here seeing as we rely on them for our exports greatly.
I Hope You’re Doing Fine
With all of this happening and certainly much, much more to come over the next 20-30+ days, I hope you’re doing fine. If you’ve been following MTM for a year or more now you should have at the very least a decent amount of money built up in your offset account from all those big extra repayments.
Maybe it’s only 6 months of mortgage repayments. Maybe it’s 16 years or perhaps you no longer have a mortgage at all. Whatever the case this is your time to shine! You’ve put in the hard work, committed the extra money others spend on jet skies and Foxtell to your mortgage and now have a solid buffer to help you through what will be a difficult time.
If you loose your job, if you get the virus and are out without pay for 5 weeks or if you have to work without pay to look after your parents who are in ICU with the virus it won’t be anywhere near as bad. You’ll have a home, low expenses, a solid offset account buffer and be able to weather the storm unlike others.
If taking the advice I write about here at MTM has helped you in the past and has now set you up to be in a more secure, stable position amongst this coronavirus shit show please let me know in the comments. There’s nothing I enjoy reading more!
The benefits include: 1) How to pay off your mortgage faster than 99% of people with one hour a month of work 2) How to get rid of your debt and have the freedom to spend money on the things you love, guilt free 3) Clear outline of how to setup your expenses, mortgage and general finance 4) How offset accounts work and how to get the same result without being gouged by the big banks 5) How to cut through the crap and focus on the things that truly matter when taking down a mortgage 6) How to adjust the strategy so it works for you, even if you have kids, even if you only have one income 7) How to do all of these things and maintain a normal social life (and never be cheap).