snack, crackle, pop-housing bubbles

Housing bubbles

Michael Pascoe

May 25, 2011 - 11:46AM

As for the other excuses for lower bank shares, the hedge funds playing the housing bubble tune has been running for long enough now to be considered a golden oldie. Beyond the self-serving potential to exacerbate market fears, it remains a brave call for the hedgies and I wonder how much money is really riding on it. The strategy ? to the extent that it might exist ? has been a loser for most of the past year.

The-Australian-housing-bubble-must-crash true believers increasingly take on the characteristics of other Doomsday cults. Oh, the world didn?t end on May 21, let?s make that October 21. Oh, Australian housing came through the GFC with barely a ripple, well the crash must be due on the second Wednesday after the next full moon that occurs with Mars rising. They?re as bad as the housing spruikers who claim residential real estate is a guaranteed path to millionaire status.

There have been bubbles in various parts of the Australian housing market ? most obviously and recently the Gold and Sunshine Coasts ? but in the scale of the past decade and the overall market, it?s easier to say average prices aren?t doing much at all. Up a couple of per cent, down a couple of per cent, policy makers won?t lose sleep.
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Indeed, a flat market is the RBA?s ideal as it would allow the continuance of the soft household deleveraging currently occurring as we collectively pay down debt. It builds a stronger economy in the medium term and helps make room for the terms of trade and capex booms promised for 2011-12.

And the big difference between deciding to back the view of APRA and the RBA against the Doomsday cult, aside from the RBA?s greater interllectual rigour and superior research resources, is that the RBA has more ability to influence the game than a few international hedge fund operators talking their own book.

What could help explain that two of the Big Four have fallen more than the other two is the increasing role of long-short funds. These players strive to be market neutral, making their money by betting on the relative performance of similar stocks.

For example, a long-short fund might take the decision that Bank A will perform better than Bank B and will therefore go long A and short B, hoping to cancel out the market risk of all banks moving in one direction or the other. What the fund is left with is the potential to gain in a rising or falling market as long as A?s shares rise more or fall less than B?s.

Thus what might look like a hedge fund shorting Bank B isn?t necessarily a judgement that Australian banking is cactus, just that Bank A has more potential.

Another supposed reason to panic is the present soft lending demand, especially in housing, but the present and immediate ? both history ? have already been well and truly priced in. If you assume single digit credit growth, just the banks? fully franked dividend yields offer a better return than is generally promised by reasonably responsible portfolios. That was the case before the latest fall, making them more attractive now that they?re cheaper.

To use the Westpac example as it?s suffered more than most, taking a snapshot at $21.52 this morning, the stock was yielding 7 per cent fully franked ? the pre-tax equivalent of 9.8 per cent. Yes, the Pascoe family super fund happily added to its holding.

Looking beyond history to where our economy and therefore banking is likely to go, the RBA, Treasury, the IMF and just about everyone else with a half credible crystal ball reckons we?re on a good thing. GDP growth of 4 or more per cent in 2011-12, strong employment growth, falling unemployment, wages growth, various surveys pointing to business looking to come out of its borrowing shell to invest ? the present subdued banking activity begins to look rather like just the base case.

On past performance, Westpac CEO Gail Kelly doesn?t inspire any confidence in knowing what?s happening with the bank?s dividend and ANZ?s Mike Smith wasn?t much better during the GFC, but probable reasons for a sudden plunge in profits that would bite into the present yield aren?t obvious to me.

And then there are the China bears, bless ?em, with us for a couple of decades now and still forecasting disaster. Various headlines and commentary frequently tell us China?s growth is slowing. Well I hope so ? something around 9 per cent would be much more comfortable for us all. And it would be nice if India cooled a little as well.

The market gibbering about China?s outlook (and therefore commodity prices) is nicely summarised in conflicting headlines available this morning. On one hand we have Goldman now ?more bullish? on commodities while we?re also offered Goldman tempers outlook for China, ASX, which is one of the less alarmist versions of the story. And the story is that Goldman Sachs now reckons China will grow by 9.4 per cent this year, down from its previous guess of 10 per cent. Big whoop.

Meanwhile our population continues to grow by a solid 1.5 or 1.6 per cent with record numbers heading our way with visas of one sort or another ? just don?t let the hoi poloi think that. With a continuing underbuilding of housing, it?s one more positive factor to have up a bankers? sleeve.

Michael Pascoe is a BusinessDay contributing editor.

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