How The Stock Market Says Aussie Housing is in Trouble

Jeez, this whole housing debate is firing up, isn’t it?

You probably saw the 60 Minutes segment on Sunday night. It showed the carnage unfolding in the Moranbah housing market in QLD, where house prices have crashed along with the mining boom. It implied there is a chance of hefty price falls coming to major cities.

As evidence, 60 Minutes interviewed US analyst Jonathon Tepper, who was unequivocal about calling Australia’s housing market a massive bubble.

Tepper did a little footwork in Western Sydney with fund manager John Hempton of Bronte Capital, a hedge fund well known for its shorting abilities. That is, its ability to sniff out overvalued assets or stock prices and profit from a fall.

They visited a number of mortgage brokers and banks as a part of their research. What they discovered disturbed them. They said they were encouraged to lie about their income and were told that banks rarely verified the information given.

And this comes as a surprise to people?

Tepper’s report on Aussie housing is doing the rounds and eliciting all sorts of views. Given the popularity of the recent movie, The Big Short, the business media is calling it the ‘big short report’ on Australia.

The standard response and rejection of the report’s claim (that Australia is in a massive bubble) is that Australia is nothing like the US was in 2006.

Well of course it isn’t. But if you think that all bubbles look alike, then you’ll never spot one. The market will never serve up a scenario that mirrors a prior bubble. That’s just too easy and the market never makes things easy.

Look, everyone’s got an opinion on Aussie housing. But opinion is worthless. The only opinion you should seek out is the market’s.

So what’s it saying?

The actual housing market remains strong, at least in the major capital cities of Sydney and Melbourne. However price growth slowed towards the end of last year, which is not surprising given the massive gains achieved.

But the housing market itself isn’t a good indicator. For that you need to turn to the stock market. Here, at least, the signs are a little more worrying. There are a number of housing exposed stocks making new lows, and others that are well off their highs.

While this doesn’t point to a crash, it does support the view that house prices might retrace some of their gains in at least some areas of the market.

Yesterday, recently listed real estate agent McGrath [ASX:MEA] warned that short term uncertainty could impact its full year results. Although you wouldn’t know it…the warning came under the heading ‘Positive outlook’. Here’s the description of the ‘positive outlook’:

The long term fundamentals of the Real Estate industry remain attractive, underpinned by historically low interest rates, population growth, and the asset class generally. However, the short term outlook is less certain and this is creating some headwinds leading to challenging market conditions than originally anticipated at the time of our listing.

I love how the fundamentals are attractive because of the ‘asset class generally’! It’s just the vibe!

Memo to John McGrath, you can’t fool the stock market. MEA promptly dropped 15% to a new low. Since listing in December (just in the nick of time by the look of things) the stock price is down around 25%.

Interestingly, MEA cited ‘a slowdown in Chinese buyer activity’ as a reason for its cautious outlook. Perhaps the crackdown on illegal purchasing of established property by foreigners is working?

But it’s not just MEA in trouble. There are other very weak stocks exposed to the housing market too. The recently listed Pepper Group [ASX:PEP] a residential housing lender, is trading at $2.30 after listing at $3.05 in August last year. It made a new low yesterday.

Mortgage insurer Genworth [ASX:GMA] also fell to a new low yesterday. Mortgage brokers Mortgage Choice [ASX:MOC] and Australian Finance Group [ASX:AFG] are also trading near long term lows.

As far as the banks go, it doesn’t look great either. Bendigo and Adelaide Bank [ASX:BEN] made a fresh new low yesterday. It’s now trading at the lowest point since 2012. Bank of Queensland [ASX:BOQ] also recently made a fresh multi-year low.

The pressure on these second tier banks reflects the recent increase in funding costs. That is, it costs them more than the big four banks to fund their loan books. The recent increase in risk aversion across the globe has exacerbated this difference.

But the big four banks haven’t been spared either. NAB, ANZ and Westpac [ASX:WBC] all recently fell to multi-year lows. The Commonwealth Bank [ASX:CBA] is very close to making a new low too.

If it cracks below $70 a share (see chart below) then it will suggest that trouble could be brewing in Australia’s largest housing markets.

Source: BigCharts

In other words, the stock market is telling you to be cautious about the property market. It’s saying that debt and mortgage growth has slowed, and when that happens, price falls are not too far away.

None of this is news to my co-editor Vern Gowdie. Vern calls this ‘the long bust’. He sees all asset prices trading lower in the years ahead. Vern has been spot on in his views so far. You can get his latest predictions here.

But it is news to a whole bunch of others, including politicians and the RBA. Ever since Labor announced their policy on changes to negative gearing rules (if elected), debate over housing has raged.

The Coalition has lost the plot. It’s gone into full fear campaign mode. But they haven’t worked out which lie to tell consistently. Assistant Treasurer Kelly O’Dwyer said that Labor’s policy would make housing more costly (don’t ask me how) while a day later a foaming at the mouth PM said it would crash the market.

That’s Democracy in action, Aussie style. Appeal to the lowest, dumbest, most self-interested group/s in society and you gain power.

Meanwhile, the RBA says there is nothing to worry about, and that loan standards are good. But just a few days ago, bank regulator APRA released data showing that total bank exposure to residential mortgages was $1.19 trillion, of which an astounding $462 billion were interest-only loans.

So 40% of the debt backing the housing market is interest only? That’s Ponzi-like finance, folks.

Good thing the housing market in Australia is different. For now anyway. But the message from the market says that is about to change.

Greg Canavan,

For Markets and Money

Greg Canavan is a Contributing Editor at Markets & Money and Head of Research at Port Phillip Publishing. He advocates a counter-intuitive investment philosophy based on the old adage that ‘ignorance is bliss’. Greg says that investing in the ‘Information Age’ means you now have all the information you need. But is it really useful? Much of it is noise, and serves to confuse rather than inform investors. And, through the process of confirmation bias, you tend to sift the information that you agree with. As a result, you reinforce your biases. This gives you the impression that you know what is going on. But really, you don’t know. No one does. The world is far too complex to understand. When you accept this, your newfound ignorance becomes a formidable investment weapon. That’s because you’re not a slave to your emotions and biases. Greg puts this philosophy into action as the Editor of Crisis & Opportunity. He sees opportunities in crises. To find the opportunities, he uses a process called the ‘Fusion Method’, which combines charting analysis with more conventional valuation analysis. Charting is important because it contains no opinions or emotions. Combine that with traditional stock analysis, and you have a robust stock selection strategy. With Greg’s help, you can implement a long-term wealth-building strategy into your financial planning, be better prepared for the financial challenges ahead, and stop making the same mistakes that most private investors do every time they buy a stock. To find out more about Greg’s investing style and his financial worldview, take out a free subscription to Markets & Money here. And to discover more about Greg’s ‘ignorance is bliss’ investment strategy and the Fusion Method of investing, take out a 30-day trial to his value investing service Crisis & Opportunity here. Official websites and financial e-letters Greg writes for:

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