Bank stocks suffered significant losses yesterday with the major four down between 2.8% to 3.9%. The financial sector has been one of the worst performing sectors this year as fear of a property market crash and bank regulation and scandals plague share prices. does not hold any of the major four banks and are significantly underweight the sector as a whole. We have been deterred from investing in the banking goliaths for the very reason they are now selling off.
An article published in the AFR yesterday claimed that London based research firm Variant Perception as labelled the Australian property the biggest housing bubble of all time. The negative sentiment quickly spread to the sharemarket and banks, a direct recipient of the health of the housing market quickly fell.
Predatory leading and falsifying of loan documentations to secure mortgages from the banks has bought to light the quality of the mortgages made by the banks. Investors are concerned that many new buyers may not have the ability to repay their mortgages, especially if the economy continues to slow.
Jonathan Tepper, an economist and founder of Variant Perception, notes that over the past few years over 40% of all new mortgages originated have been interest-only mortgages. This can suggest a rather worrying sign that recent housing purchases have been made on the premises that house prices would continue to rise and in which case the investor’s equity in the house would increase. With interest only mortgages, no capital repayment is repaid and they are generally used to capture rises in prices before investors look to swiftly sell. If these claims are true, this is rather concerning given the, albeit moderate decline in Australian house prices recently. The reason being, these fast fickle investors are the ones that are forced to sell first if house prices do fall. This could spark further price declines as they look to find the exit.
have been highlighted the risks to the housing market in the past. Particularly in Australian and New Zealand given the material price appreciation in the past decade. However we are not as bearish on the sector as the likes of Variant Perception. Although we believe some price correction is needed by no means do we believe a full blown collapse is on its way.