Wednesday, September 7, 2011

De-Risking the Future

I've been struck recently by the similarities between the Irish consumer and the American consumer. Both went on a borrowing binge fuelled by cheap credit. Both poured unprecedented amounts of money into property thereby fuelling a massive bubble. Both are now struggling to undo the damage by paying off debts and avoiding additional borrowings. Surveying the US consumer landscape, the Blackrock Investment Institute has observed that:
In the past expansion, consumer spending growth was able to outpace income growth because of the wealth effect created by the housing boom, which increased the collateral value upon which consumers could lever, fueling a coincident expansion of credit. In our view, however, the era of abundant consumer credit has ended, at least for the time being. In future years, it is more likely that secular tightening in consumer credit markets will force US consumers to keep consumption growth roughly in line with income growth and to slowly reduce their current level of leverage.

We think that these trends, coupled with stubbornly high unemployment, higher commodities prices, and slower growth in wages and salaries, will likely contribute to a lower level of personal consumption growth over the next few years. Moreover, since consumer spending is a key component of the GDP growth rate, this would argue for generalized economic growth levels that are, at best, modest for years to come, and may in fact appear anemic when compared to pre-crisis growth rates.
The same, alas, applies to Ireland. The big de-leveraging has still some way to go. Irish consumers know this of course. The fundamental psychological driver is risk. People consider it too risky to buy house, change their car, or even to take a holiday. But life goes on, and people want to live a little. That is why consumers in America and Ireland are increasingly attracted to options that allow them to de-risk the future. And the best way of de-risking a purchase decision? Don't buy, rent.

I've suggested before that we will be renting the future. I was thinking mostly about tenure. But now it looks like renting is becoming the new buying across a wider range of consumer markets. For example, US home furnishings store Best Buy have set up 'Rent-a-Centers' where consumers can rent furniture etc, and return the items if they no longer wish to keep them. Sure it's a variation on hire purchase, but such innovations are now much easier and cheaper to operate (for sellers and buyers) thanks to communications technologies. One fascinating example of the impact of technology is Airbnb. This turns consumers into landlords: so you can rent a spare bed (or air bed - hence the name) for one or more nights, generating extra income when you need it. Two million bed nights later it looks like there's a demand for it... Ireland's B&B industry could be transformed (or obliterated - depending on how it plays out) by such innovations.

These are examples of the new reality: buying is the new 'wasted money'. Renting is the least risky way to get hold of the things (furniture, cars, accommodation) that people still need. There is a new generation growing up in Ireland most of whom will never know job security, will never see property as a sure thing, and who will avoid those life decisions that are 'irreversible' and therefore risky for as long as possible. Sadly including getting married and having children.

Just like their American counterparts.

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