The Best (and Worst) Way to Bet on Falling Australian House Prices

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There was one big surprise from the Port Phillip Publishing ‘After America’ investment symposium. It was the lack of questions about the Australian housing market.

We felt sure we’d get a grilling on it.

But we didn’t.

In a way, that’s good. We think it means investors have moved on from wondering if the Aussie housing market will crash, to thinking about how long the crash will last.

In our view, it’s going to last a long, long time. And that means there’s still plenty of time for you to take a punt as Australian housing enters a multi-year (perhaps even multi-decade) bear market.

So, what’s the best way to profit? Simple. You bet against the sector most leveraged to Australian house prices

The Worst Property Investment You Could Make

But first, there is something you should avoid. And that’s the ASX Property Index.

According to the Australian Securities Exchange (ASX):

“The indices have been specifically designed to track daily value changes in the Australian residential property market and are constructed using the latest possible property sales information thereby avoiding the 6 to 8 week reporting lags present in other property indices.”

At the moment, the index isn’t tradeable. But there’s no doubt the ultimate aim of the ASX is to develop a tradeable instrument.

The problem we have with the index is that it’s only derived from house prices. It isn’t an index of actual house prices. By that we mean it’s subject to the mathematical formulas used to create the prices rather than actual trading in the housing stock.

Sure, it takes into account property sales. The trouble is, it uses fancy formulas to work out the price of other houses.

To our way of thinking, that leaves too much of the pricing process in the hands of boffins rather than investors.

Add to that the ASX’s poor record of creating new trading products and… well, let’s put it straight: there are other, better ways of betting on or against the Australian housing market.

The best of them is the Australian banking sector…

Lower Profits and Lower Returns

Today the Australian Financial Review (AFR) takes note of what we’ve said for years. The AFR writes:

“Investors in bank stocks have been warned that the ‘glory days’ of the big four profiting from windfall gains by playing the financial markets are over.”

Trust the mainstream press to arrive late on the scene. Just as they’re only now warning about falling Australian house prices – something we warned you about when it was useful… over three years ago!

The banks are leveraged so much to the Australian housing market, it’s just not funny. The only reason the banks have clocked up big profits is because they helped fuel rising house prices. The higher prices went, the bigger mortgages became.

But as anyone with even a basic idea of leverage will tell you, it’s a double-edged sword. When the market is going in your favour, leverage provides a nice boost. But when the market goes against you… the leverage goes against you too.

As the Age reported yesterday:

“Property information group RP Data said that 6.4 per cent of homes were valued at less than their purchase price in the December 2011 quarter, rising from 4.9 per cent of the market in the September quarter.”

And that’s not the worst of it. Because it doesn’t include properties valued marginally higher than the debt. That’s important because with interest rates at 7%, borrowers need house prices to rise at least that much in order to be ahead of the game.

So if you include interest costs, we’ll guess you can double the number of households that are in negative equity.

And as anyone with even a basic idea of the banking system will tell you, negative equity and falling Australian house prices is bad news for Australian banks. Because it means a borrower needs smaller loans to buy a house… and that means less income for the banks.

And that means lower profits and lower returns for investors.

That’s what makes it a good idea to sell the banking sector now. Despite the fact Australian bank stocks have already taken a beating over the past two years…


Source: CMC Markets Stockbroking

To some degree, investors have priced in lower bank profits. Proof of that is in the high dividend yields. Investors are saying they don’t believe the banks can keep racking up profits and increasing dividends.

The Surest Way to Invest in “Aussie Property”

But as we see it, the big Aussie banks haven’t seen the worst of it yet. The longer the Australian housing market stagnates, the more disillusioned property investors will become.

And with negative rental yields and no capital growth, that makes housing a terrible, terrible investment. Look for Australian house prices and Aussie bank share prices to head even lower this year.

Sell or short sell ANZ Bank Ltd [ASX: ANZ], Commonwealth Bank [ASX: CBA], National Australia Bank Ltd [ASX: NAB], and Westpac Ltd [ASX: WBC].

But manage your position and risk carefully. This market is very volatile. So never risk or invest more than you can afford to lose.


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