If there has been any theme in investing over the last ten years or so, it has been one of leveraging. Borrowed money has been too cheap and freely available that using it to buy assets has become a one way ticket to riches, whether in property, cash deposits in another country or in the stock market. Most visibly, the Private Equity funds have bought publicly listed companies pretty cheaply with debt and then been able to flog them back to the markets slightly revamped for a huge premium. Homeowners have found that by borrowing to the hilt (a level, itself, which has been increased over formerly acceptable limits), they make a fortune just by owning a property. The debt is cheap and all of the profit is theirs, even if there is nothing to do with it but plough it into another over-priced property.
Now, like all parties, it had to come to an end. The end has been prophesied for so long now that it is hard to believe that it is finally come, but come it is. We have now entered a period of de-leveraging, paying down debt. The question is, what does the end mean for us all?
Well, if you run a Private Equity fund, it may mean an awkward discussion with your investors as to why you have lost them money now that your bank has gone cold on the whole thing. For the majority who do not, it may mean a protracted period where the value our homes stagnate. For those who are happy to sit tight, not much will change, although our confidence will be dented. So long as interest rates do not go up too much, our day to day existence will not be affected, we shall just have to change our dinner party conversation back to the one of the early nineties.
It could be that our loss of confidence, which is often expressed in our shopping habits, may drive the economy into a recession. Even if it does not, it may not be a great time to be an estate agent. In another five years’ time, things will be better again and another five years after that we shall be ready to turn the music up again for a party as our hangovers will be forgotten.
