The Valor Blog.
Investment News and Views, Direct from Our Team.

Well Constructed Argument on Housing…

A very good article by macro business about Australia’s housing market is here.

I sleep very well at night knowing that I do not hold assets which are 10 times geared betting that our housing market will get substantially better from here (aka Aussie Banks).

In the short term, I am guessing that there will be more suckers being caught up in this fad of rushing to yield and the prices might go a bit higher. If you are a trader, you are going to have a fantastic time riding this fad. But like all fads, they don’t last. In the end, the true valuations of the stocks will revert them back to where they really should be long term. (this might take a few years though, it all depends on interest rates and China) The secret to investing is not riding the tops of the bubbles like the dot com, the leveraged property trust bubble or the mining boom, it is actually about attempting to avoid these bubbles because when they pop, your losses on the downside can be¬†crippling.

For those of you who like to ride the tops of bubbles (all the brokers who get paid for convincing people to buy and sell). Enjoy. I prefer to buy wonderful businesses when they on sale and detest owning highly geared businesses when they are at the top’s of their cycles and trading up to 5 times the price of than their global peers. (Aka Aussie Banks).

If I am wrong and we are going to make our property bubble worse, then I will likely eat my words for a few years, but if we grow our household debt at above GDP and income growth for the forseeable future (as projected in the Commonwealth bank analysts projections), then we will succeed in having one hell of a housing bubble. I think growing household debt above income or GDP growth from here is an extremely dangerous paradigm. For the banks to be worth their lofty multiples, the need to grow at rates that would put household debt to 130% to 140% of GDP. This would be about double the current US household debt to GDP ratio. We currently have the biggest housing bubble in Australia’s history, but if the banks are to grow at the rates their earnings multiples imply, we would have the biggest housing bubble in the history of the world. With China likely to have a hiccup soon, that is something I dont think is likely.