Creating a New Storyline for Australia’s ‘Big Short’

Creating a New Storyline for Australia’s ‘Big Short’
CATEGORIES: Viewpoints

Creating a New Storyline for Australia’s ‘Big Short’

While travelling this week to Newport Beach for PIMCO’s upcoming Cyclical Forum, I was pleasantly surprised to see “The Big Short” was one of the movie options on the plane. The story of a few bold investors who successfully bet against the U.S. housing market before the financial crisis hit, it got me thinking about the Australian property market and banks once again.

The ongoing debate in Australia about whether or not “The Big Short” is relevant for Australia’s property market remains fascinating. To come to any plausible conclusions, focusing on the facts is crucial.

  • The Australian economic miracle is breaking records in terms of years without recession.
  • Australian housing is expensive using global comparisons.
  • The Australian consumer is among the most levered in the world. (See our analysis of household debt.)

So, what to do with these facts?

Taking huge short positions to bet against Australia’s property markets would be dramatic, but it would come with huge risk, as “The Big Short” shows so well. Instead, an important lesson from other investors who successfully navigated the global financial crisis is de-risk when you still have the choice and before prices adjust. Whether you believe in bubbles or not, Australian house prices remain near their peak, and now is an opportune time to consider de-risking by diversifying portfolios away from property.

How? If house prices are in fact bubbly, then the first derivative of the problem is in the property itself, so adding investment properties, in our opinion, to an already concentrated and levered portfolio should be completely avoided. Less direct ways to underweight residential property have already adjusted in price somewhat; for example, prices of bank shares and bank hybrids have dropped and now better reflect their risk.

In determining where to invest instead for income generation, many investors might be surprised to see the value available now in a high quality sector: global investment grade corporate bonds. Concern over global growth rates and the steep drop in oil prices have driven yields higher on corporate bonds across the board, including those with strong fundamentals, creating an investment opportunity at the right time for Australian investors. Global investment grade credit can potentially provide income and diversification away from both property and the Australian economy – an important consideration for believers in the Australian “big short.”


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All investments contain risk and may lose value. The value of real estate and portfolios that invest in real estate may fluctuate due to: losses from casualty or condemnation, changes in local and general economic conditions, supply and demand, interest rates, property tax rates, regulatory limitations on rents, zoning laws, and operating expenses. Investing in the bond market is subject to risks, including market, interest rate, issuer, credit, inflation risk, and liquidity risk. The value of most bonds and bond strategies are impacted by changes in interest rates. Bonds and bond strategies with longer durations tend to be more sensitive and volatile than those with shorter durations; bond prices generally fall as interest rates rise, and the current low interest rate environment increases this risk. Current reductions in bond counterparty capacity may contribute to decreased market liquidity and increased price volatility. Bond investments may be worth more or less than the original cost when redeemed. Investing in foreign-denominated and/or -domiciled securities may involve heightened risk due to currency fluctuations, and economic and political risks, which may be enhanced in emerging markets. There is no guarantee that these investment strategies will work under all market conditions or are suitable for all investors and each investor should evaluate their ability to invest long-term, especially during periods of downturn in the market. Investors should consult their investment professional prior to making an investment decision.