Ed: Housing Market is in chaos and has been pumped up by the bankers. Lazard advises not to be doubly exposed with mortgage and bank shares which have already fallen 20%.
Economists who have studied the housing bubble understand the key issues of why we teeter on the edge of a recession. Home affordability for Gen "Y" will return as market plummets back to 2001 in a hurry. Be warned. L F Economics wrote submission to Parliamentary PJC Committee on this research in July 2015. Lots more to come as we push for Royal Commission into Banking................... Denise Brailey
Australians have amnesia on housing and banks
Business Spectator 11 March 2016
Victoria Thieberger
Australian investors are far too over-exposed to housing and should not be doubling down on that risky exposure by owning shares in the banks as well, according to Lazard Asset Management.
Lazard portfolio manager Philipp Hofflin says his greatest concern is the risk posed by the housing market, which he argues is fundamentally overvalued as an asset class.
“We are concerned about it because we think the price is fundamentally wrong,” Hofflin told a conference of investment advisers in Melbourne.
“It is the biggest issue that faces Australia and the largest asset class by far. There are clearly signs of speculative activity,” he said, citing high levels of interest-only loans and the majority of first homebuyers choosing investment properties rather than owner-occupied.
The media has been awash with reports in recent weeks about the risks of the housing bubble bursting, but Hofflin says it is impossible to predict the timing of such an event because you could only identify the catalysts in retrospect.
But if capital-city housing were a fully equity-funded stock (with no debt), it would be trading at a price to earnings ratio of 65, compared with a long-term stock average of 16 to 17. Units are trading about 49 times earnings.
The net yield on an Australian home of 2.2 per cent is well below the comparable yield on a US home of 6.2 per cent; on a unit it is 2.9 per cent compared with 5.7 per cent in the US.
He pointed to parallels with Australia’s two previous debt-fuelled housing booms in the 1880s and 1920s, both of which were followed by extended economic depressions.
“We’ve been here before. We got here because we suffer from collective inter generational amnesia,” Hofflin argues.
Australians’ over-exposure to housing is evident in the middle 60 per cent of income households, where housing accounts for 90 per cent of their net worth. At the top of the US housing bubble in 2006, that figure was 36 per cent of the household balance sheet and it fell to 28 per cent in the recession.
“Often in Australia, the only other thing they own is bank shares, who lend on that property, and hybrids, and term deposits with those same banks. It is one very large, concentrated risk,” Hofflin says.
Of investors who directly own shares, over 60 per cent are held in the banks while 80 per cent are in financials.
Pointing to a “phenomenal”, unprecedented rise in gearing in Australia, the fund manager said Australian bank credit averaged 39 per cent of GDP from 1861 to 2015. It rose sharply in the past two decades to reach 125 per cent of GDP in 2015.
Even though the major bank shares have fallen by around 20 per cent and several have raised capital, it would be dangerous to expect that the coming years would look similar to the past. “When the cycle does turn, you don’t want to be anywhere near them,” he says.
“The right approach is diversification. I don’t think many people in Australia, given how many homes they have, need a lot of banks in their portfolio as well.”
For sceptics who might be wondering whether Lazard is shorting bank stocks, as became clear with several hedge funds who recently publicised highly inflammatory internal research about a housing bust, the fund is not. Lazard runs a long-only equities fund and has a total of $26 billion in assets under management in Australia.
Short positions in the big four banks jumped after reports from hedge funds Variant Capital and Bronte Capital that the Australian housing market was ripe for a 50 per cent price collapse, prompting more hedge funds to short the banks.
The risks of a bust have been downplayed by economists and other market analysts, who point to the logic of interest-only loans in a negatively geared investment that offers the largest tax deductions. The economy would usually need to tip into recession or interest rates be pumped higher to trigger a housing bust.