The sharemarket tsunami of 2008 was not only much more severe than the wave that pounded investors in 1987, but it slammed into a far more crowded shore.
During the 21 years between two of the most severe financial storms of the past century, share ownership in Australia skyrocketed with the introduction of compulsory superannuation contributions in 1992 and the privatisation of a string of government corporations, including Commonwealth Bank of Australia, Telstra and Qantas.
Further, the number of investors who were close to or already relying on their investment portfolios to fund their retirement surged.
Figures from the Australian Bureau of Statistics show that the number of people over the age of 60 jumped by more than 50 per cent to 3.8 million between 1987 and 2007. By 2007, nearly one in five Australians were 60 or over – an awful lot of investors potentially washed up, with little time to recoup portfolio losses.
“You certainly have had a lot of baby boomers entering the pre-retirement zone. It’s like a perfect storm for baby boomers,” says Chris Morcom, director of financial advice firm Hewison Private Wealth in Melbourne.
“Demographically [the financial crisis] has come at a terrible time. It has come at a time when the baby boomers are trying to preserve their wealth,” adds Shane Oliver, head of investment strategy and chief economist at AMP Capital Investors.
The age demographic might partly explain the difference in reaction to the global financial crisis, compared with the crash of 1987.
In the late 1980s, private investors headed to property. With household debt levels low – just 35 per cent of household income – savers were happy to take on extra borrowing and switch from shares to investment property. The result was a 56 per cent surge in the price of the average Australian house between September 1987 and March 1990.
This time the response has been quite different, notes Oliver. The flight to property has been curtailed by the tightening of banks’ lending policies and concerns over household debt levels, which have reached a hefty 155 per cent of household income. Local investors have also been rattled by the sharp downturns in offshore property markets, in the United States, Britain and Ireland in particular.
Flight to cash
So rather than buying property in the wake of the 2008 crash, investors poured extra savings into cash and fixed income.
Between 2002 and 2012 the proportion of savers who believed bank deposits were the wisest place for savings jumped to 39 per cent – the highest proportion since December 1974 – from 15 per cent, according to a survey by Westpac Banking Corporation and the Melbourne Institute. The proportion who said paying off debt was the best move doubled to 20 per cent.
Perhaps unsurprisingly, house prices have not hit the stratosphere as they did in the late 1980s. Oliver notes that average house prices have risen 10 per cent since November 2007.
Investors can only hope that their response to the collapse in equity prices this time will produce a better outcome than in 1987.
In the late 1980s, interest rates surged to 18 per cent as the Reserve Bank of Australia tried to curb rampant inflation and business investment, and keep house price rises at bay. For anyone who had borrowed to buy an investment property, it was a painful experience.
Unfortunately, there are no guarantees that the thousands of investors who have piled into bond funds will emerge unscathed. Returns from bonds, including sovereign bonds, may have been strong for the past five years, but warnings of a bond market bubble are becoming more shrill.
While returns across several asset classes may be under pressure, at least investors have a few more protections against fee-hungry operatives in the financial services industry. As is often the case with financial crises, the government has not let the 2007-08 crash go unmarked, and it has introduced a raft of reforms to improve investor safeguards.
These include the banning of commissions on investment products, forcing financial planners to act in the best interests of clients, tightening credit laws, removing tax breaks on agricultural investment schemes, introducing no-frills super products and forcing super funds to improve disclosure of everything from investment returns and fees to directors’ salaries.
“No doubt the environment is safer now,” says Grahame Evans, principal of Mente, a financial planning industry consulting firm.
Anna Carrabs, director of private wealth at accounting firm William Buck, says the banning of commissions is “very, very important”, but she argues the government needs to do more to protect savers, particularly trustees of self-managed super funds. She says the government needs to curb property spruikers who encourage setting up a DIY fund to buy a house or flat.
“This is just the start of the process,” Carrabs says. “The government knows it has a lot of work to do.”
David Hasib, partner in the financial planning division at accountant Chan & Naylor, is also concerned that property spruikers are recommending DIY funds to unsuspecting savers for the purpose of buying an investment property, while trustees are being directed by advisers who have no particular specialisation in self-managed super.
“SMSFs are becoming extremely comprehensive and complicated. There should be a specialist competency,” Hasib says.
Hasib is also calling for a universal regulatory body that governs both planners and accountants.