Shorting Australian banks becoming a ‘crowded trade’

In a research note published on Saturday, AMP Capital chief economist Shane Oliver responded to last week’s Big Short reports – saying foreign hedge funds and various commentators have been predicting a property crash for more than a decade and have “proved wide off the mark”.

“Australian home prices are likely to see yet another five to 10 per cent cyclical fall at some point in the next few years and yes home prices are overvalued, posing a downside risk, but a 50 per cent crash is unlikely,” Mr Oliver said.

“The latest crash call aired on 60 Minutes has raised nothing that wasn’t already well known,” he said.

“Australian property is no more overvalued than it was a decade or so ago. The ratio of household debt to income is about the same as it was prior to the GFC, but interest costs have collapsed and there are no signs that Australians are having trouble servicing their debts.”

Mr Oliver admits there has been “some easing in lending standards”, but he does not accept that Australian banks are not regularly checking for proof of income when processing loan applications, “particularly with APRA breathing down their necks on ‘bubble’ worries”.

“More fundamentally, Australia has not seen the growth in low doc and sub-prime loans that don’t even require people to lie about their lack of income which were central to the US housing crisis that triggered the GFC,” he said.

“To get a crash we will either need a massive rise in interest rates (which is unlikely because the RBA is not stupid) or a deep recession in the economy which seems unlikely.

“Seems to me that some people have just seen The Big Short and want to be film stars (or least are desperate to find the next big short). The trouble is that shorting Australian banks is becoming a rather crowded trade.”

[Related: Lawyer slams 'dangerous' media reports on mortgage industry]