How the ‘87 crash shaped a generation

The sharemarket crash of 1987 was a major global event, but it hit New Zealand much harder than other countries.

It scarred an entire generation and completely changed the fabric of how we invest.

Black Monday saw the S&P 500 index in the US plunge 20.5 per cent in a day, and it fell 33.5 per cent from its peak in August of 1987 to its trough in December of that year.

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However, the US economy avoided recession and the market had recovered those losses by July 1989, 20 months later.

The UK and Japan weren’t dissimilar, with major sharemarket indices falling 35.9 and 25.2 per cent respectively.

Those are heavy losses, but the UK market had retaken its previous highs 26 months later and Japan within a year.

Here in Aotearoa, things were very different.

The sweeping economic reforms of the 1980s had transformed New Zealand almost overnight.

Financial markets were deregulated, exchange rate controls were removed and banks (which were suddenly flush with funds) competed aggressively for customers to lend to.

Easy credit fuelled a wave of speculation.

Investors borrowed to buy shares, while a new breed of highly leveraged investment companies borrowed to buy businesses, commercial real estate, and sometimes each other.

Takeover activity exploded, dozens of companies listed on the stock exchange and optimism became almost euphoric.

In the five years leading up to the crash, our benchmark sharemarket index (which was the Barclays Capital Index in those days) rose almost 500 per cent, way ahead of the US market’s 196 per cent gain.

When global markets cracked in October 1987, we weren’t just caught in the downdraft.

Years of leverage and speculation turned an international market correction into a domestic financial crisis.

The New Zealand sharemarket fell 57.2 per cent from top to bottom, a much steeper decline than the US, UK or Japan.

It also took us a lot longer to recover, and our market didn’t retake that September 1987 peak until October 1996.

That’s almost nine years after the bottom in early 1988, compared with just one or two in some other countries.

How New Zealand’s ’87 Crash Stood Apart

The crash was the culmination of an extraordinary period in our financial history and the damage spread well beyond the sharemarket.

Unlike the US, New Zealand entered recession in late 1987.

Dozens of listed companies disappeared over the following years as debt-fuelled business models unravelled, while commercial property slumped and banks were left nursing heavy losses.

Another legacy of the crash was the behavioural change we saw from investors.

Many investors who lost money vowed never to own shares again, and property became the preferred way to build wealth.

The crash wasn’t the only reason for that shift.

Falling interest rates, favourable tax settings, strong population growth and constrained housing supply in the decades that followed all contributed too.

But our country’s deepest sharemarket collapse, longest recovery and the severe destruction of investor confidence was another structural tailwind for residential property.

Nearly forty years later, the scars of 1987 have faded.

The 45-year-olds that lost big back then are now in their 80s, while the children who witnessed that pain as teenagers are approaching 60.

Those children grew up with a distrust for the sharemarket, so their default financial plan was to buy a rental property or two.

That worked well through the 2000s and 2010s as prices increased at an annual rate of almost seven per cent, the return that ensures prices will double every ten years.

Throw in some leverage and things looked better still, so everyone kept on doing it.

Their children, however, are now in their late 20s or early 30s and they’ve had a very different experience.

Anyone they know who has bought in the past five-and-a-half years has at best broken even, or at worst lost their deposit.

When you adjust for inflation and account for the costs of ownership (which keep rising) things look uglier still.

These 20-and-30-somethings still aspire to live in their own home, but rental property investments don’t hold quite the same attraction.

In contrast, they have no fear of financial assets like their grandparents, thanks to KiwiSaver and the advent of modern investing platforms.

Index funds and ETFs are widely understood, international diversification has become normal, and share investing happens automatically every payday for millions of New Zealanders.

Our collective love affair with residential property isn’t over, but as an asset class it no longer enjoys the aura of invincibility it once did.

For decades, the memories of 1987 saw many New Zealanders favour property over financial assets.

Today’s investors have been shaped by a very different set of experiences.

They see the sharemarket as central to their wealth-building strategy, and they view volatility or declines as an opportunity.

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