I am sure most of you saw the 60 Minutes segment on the approaching housing collapse in Australia and then a similar article in the AFR on Thursday, referencing some on the ground research conducted by Jonathan Tepper of Variant Perception. The on-air segment and article highlighted some of the very key points that I had highlighted since December last year warning investors to exit the banks due to their extreme leverage to a decline in property values, volumes and construction activity. Moreover this slowdown is coming at a time.
For those that missed the 60 minutes report or the AFR article here are the main key points:
1) Mortgage brokers have been advising applicants to lie on bank applications about deposit size and income
2) Rarely do banks check and verify the details in the applications, including payslips
3) Banks have been offering discounts of up to 1% to low income earners- the very people who cannot afford a larger loan
4) Prices in outer west Sydney are reaching prices of $11,000 per square metre almost Manhattan prices of $14,000 per square metre
5) Almost half of all loans now written are interest only
6) Australia’s residential property value has now reached 3.8 times GDP, above that of 3.5 times GDP which triggered property crashes in Ireland and Japan.
7) Australia now carries the largest household debt to GDP in the world
All of these factors are scenarios that played out during the sub-prime mortgage boom in the US leading to the last GFC and practices being adopted currently by mortgage brokers and banks are identical.
The reason why I am bringing this to readers’ attention is that this presents another warning of caution, so if you listen to me then here is someone else to listen to. My point is to get the message across.
I am yet to read any research that presents a sufficient case otherwise. I am aware that there have been doomsayers in Australian property for decades. Yes, for the past 20 years I have constantly heard that property prices will collapse. But this is the first time I have turned bearish based on real hard facts and evidence and the impact for the banks could be very significant.
One aspect that wasn’t touched on by the AFR or 60 Minutes, will be the impact of a serious devaluation in the Chinese Yuan. As the Chinese economy continues to slow the country will also witness a severe increase in non-performing loans, sparking a credit crisis that will place ongoing pressure on their currency. Capital flight has been a major issue which will drop significantly with the decline in the Yuan. It is this current capital flight that is supporting Australian property prices.
I shorted the banks last year and have been adding to my positions on subsequent short-term rallies as I indicated I would. This is my hedge to my own residential house dropping in value. In fact, the share price of Commonwealth Bank (CBA) has one of the worst technical formations and when combined with the fundamental back drop we have a dangerous situation presenting itself. I warned earlier in the year that my target for CBA was $62 this year and the share price is on the brink of breaching $70.
Why $62? Looking at the monthly chart below we can see that in the first half of 2008 when the GFC began the initial sell off in CBA saw the share price return back to the prior record high of the last cycle across $35. Ultimately it went lower but that was the first stop. An identical sell off brings CBA back to the pre-GFC high of $62.
Second, the sell off during the GFC saw CBA decline a total of $38 from peak to trough. Taking this sell off and projecting it from the record high and a target of $58 is generated. Finally a 50% correction of the entire post-GFC appreciation exists at $60. So the combination of these three targets gives a very strong array of levels in close proximity to each other in the $62/58 zone. So first port of call $62.
Next, look at the 10-year long weekly chart below. There is a large top formation that has been in place over the past two years which is on the brink of completion. A break under $70 completes this top and the risks of the sell off accelerating increases substantially. This technical set up is again not dissimilar to that of 2008. In the office I have market CBA as the ‘worst looking chart in the world’. Considering the risks presented to the housing market, margins and the premium CBA trades at compared to its local and global peers it is very vulnerable. CBA has been caught up in shady practices by its financial planners in recent years and considering the feedback from mortgage brokers, I am certain many ‘t’s weren’t crossed nor ‘i’s or ‘j’s on many loan approvals. These factors only surface AFTER the gravy train stops.
Don’t think I have focused purely on Australian banks. I showed last year US banks that were on the brink of collapse and have since been crushed. JP Morgan at their investor day this week noted that investment banking revenues were down 25% on last year! This is added to the disastrous situation of negative interest rates being increasingly adopted around the world which is making it difficult to banks to make money. Add in a real estate correction and the impact on equity prices will be severe.
I have also been shorting Minsheng Bank in China (below). This is the largest lender to the private sector in China. Non-performing loans are rapidly increasing and writedowns will need to be made by lenders. The private sector in China is the area of most concern, where loans have been made for ridiculous ventures. Government owned banks and enterprises can be recapitalized by the Government however, the listed banks with little to zero Government shareholdings are at biggest risk of collapse.
There are consequences for every action. The consequences of negative interest rates will be the banks being unable to maintain their previous profit and margin levels. Sprinkle some real estate and currency volatility on a global scale and a potential change to negative gearing and the local impact will be seismic. I want to be wrong, but I have to call like I see it. And so far unfortunately the banks keep sliding.
