We're in it Together

In all my years as an investor, the one failure I come across is our inability to see how we are all connected. For example, one statement among property commentators is the belief that while interest rate rises impact a property owner or investor's residual income, so long as they don't lose their job, they can pay the mortgage or investment loan. The follow up is - so long as there is full employment then all things are hunky dory.

Let's work through this. How would someone lose their job?

One way people lose their job is when demand in the economy falls which sometimes leads to a recession unless the government steps in and spends a lot of money. This is what many governments did after the Global Financial Crisis and Covid, no doubt helping people keep their jobs so they could continue to pay down their mortgage or investment loan. 

Another way to reduce overall demand is to raise interest rates which leaves less money for spending because the loan repayment increases as a proportion of income. For example, you may have $500 a week to spend but after a rate rises (or several in Australia's case) you now only have $250. Most people will choose to pay down the loan and reduce their spending. No more avo on toast or daily flat whites. 

Falling demand and lower spending leads to less demand for staff, or for some workers, fewer hours  leading to a loss of their job or reduced wages.

Someone's spending is someone else's income - Cut spending, cut income. 

On an aggregate level, many people reducing their spending leads to fewer jobs and this is where we see the connection. The more unemployed there are, the more likelihood that you may lose your job as demand for your goods and services falls. Maybe your tenant loses their job and moves to cheaper accommodation. 

Another misunderstanding among the property commentators is the belief government will step in to stop the price falls. The GFC and Covid were widespread events, wide enough for governments to act given the size of the problem. 

If large numbers of people start losing their job there is little doubt government will do something. But if you as an individual lose your job, it's unlikely the government will rush to your aid until the numbers are sufficiently large to warrant their attention. 

We talk a lot about how investors should focus on not losing money as your primary goal. When you are looking at your investments or wealth, remember to look not just at what can happen to you as an individual but also at the whole economy. If many people lose their jobs then maybe they stop buying your product or service. Maybe they look for a cheaper place to rent. 

We are connected in ways that we often don't see.