9:15 AM, 18th April 2012, About 10 years ago 17
Well think again, but before I tell you what really caused the credit crunch, I must first explain why I wrote this article.
Recently after reading several books on property investment, each offering up their own reasons for what caused the credit crunch/ property crash it was clear that the real reason was being missed. Contributing factors just like a runny nose and a sore throat are just symptoms of a cold; they are not the actual cause.
Previous to this I also read a book about the sub-prime crisis called the ‘Big Short’ by Michael Lewis. Yes the lending machine, particularly in the US, got totally out of control. Money was lent en masse to people and companies that just couldn’t afford to pay it back. Then, all those loans were rolled up into bad investment bonds that institutional investors traded like football stickers. In truth Wall Street became a financial circus with investment banks continually chasing quicker and bigger profits; a ticking time bomb!
These and other similar actions like big corporations growing and growing by acquisition, adding massive debt to their balance sheets with little concern for shareholder value is again another symptom of the credit crunch, but not the root cause.
Remember our actions are determined by our thoughts and our thoughts are determined by our philosophy. By that virtue if society is encompassed by a crisis like the credit crunch/ subprime crisis then its society’s philosophy not the actions of society that’s at fault.
Furthermore, following the credit crunch it appears that we could still be living in denial. Denial is not a river in Egypt; denial is a process by which painful thoughts are not permitted into the consciousness. Little has really changed and it’s just a matter of time before the lending rules are relaxed and the financial floodgates of greed open once again.
So for now let’s put aside all the contributing factors of the credit crunch such as building supply exceeding buyer demand, rental supply exceeding tenant demand, collapse of the mass mortgage market, an increase in repossession properties, new restrictive lending, larger deposits needed and a complete loss of buyer confidence.
Society today has become obsessed with the quick fix. Everybody wants instant success and instant reward. We crave for the quick fix and everything instant from ‘Instant Meals’ to ‘Instant Weight Loss’ to ‘Instant Cosmetic Improvement’ and of course the big one ‘Instant Wealth Creation’. And let’s not forget the quick fix to end all quick fixes ‘The Atomic Bomb’ designed to end all conflicts without self-casualty or involvement.
Let’s face it when a book entitled ‘Total fitness in 12 minutes a Week’ becomes a National bestseller we seriously have to ask ourselves what’s going on with society. Why are people buying en masse into so many pie in the sky quick fix instant reward scenarios? Why is it that we have become so impatient? Why is it that we now want all the gain without the pain?
It was society’s obsession with quick fix instant reward that caused the credit crunch; it’s our philosophy not our actions that’s at fault. The ‘We want it now’ philosophy is the root cause of the problem and one that became ever more prevalent from the 1980’s onwards.
Let’s face it, we wanted it and the lenders and mortgage brokers en masse were giving it to us regardless of credit record or provable income. In truth the system cared not as long as commissions and fees were flowing. Everyone was caught up in the Instant Reward with no thought for the long term future. In short the financial world was on a journey of self-fulfilment, hooray for me to hell with everyone else. So we were all to blame, but some sectors of business and society were more to blame than others.
Looking back the philosophy and encouragement was more debt means more progress. The bigger the debt the bigger the potential return and many people bought into this notion with abandonment. However, one
person’s progress can be another person’s devastation. Many people as a result fell afoul of this instant wealth philosophy and ended up in the bankruptcy courts.
So was this mistaken philosophy a worldwide problem? Yes and no, it’s more a western world contagion, but the rest of the world is dragged in too.
However in countries like South Africa where lending followed a more conservative path the property crash was non-existent by US and European standards.
The answer is no, but we can change our own individual philosophy.
Will it ever happen again? You bet it will, it’s not a case of if, it’s just a case of when. But look on the bright side- such events are a gold mine of opportunity for the savvy and well prepared investor; it’s an opportune time to build your property portfolio.
Right now in terms of property investing what can we do? The solution is to go back to property investment basics. Buy when everyone else is selling and sell when everyone else is buying. Understanding property cycles will help to spot these the trends and aside from that you need to look for real property value.
There’s also no need for convoluted and complex property investment strategies. Today there are more than enough property bargains to be found and mortgages can still be obtained and equity gains can still be released by re-mortgage or further advance. Property investing should never be about getting something for nothing, but it should be about getting out more than you put in.
The best and simplest form of property investing is ‘Value Investing’. If you look after the downside, the upside will take care of itself; you make your money when you purchase not when you sell. “Property investing is a process not an event.”
So let’s get back to investment basics and stop these notions of quick fix instant wealth. A winning property investing strategy is all about performing a winning process over and over again for a considerable period of time. If you do this, then and only then will you create real and lasting wealth from property.
“Life is designed to give us what we deserve not what we want.” – Jim Rohn
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