Australia Housing Shorts are `Widow-Maker' Trades, JPMorgan Saysby
Home values may see steady 5% to 10% drop, not 50% crash
Prices to crash only if unemployment, interest rates rise
Australian home prices could wind back slowly rather than crashing, according to JPMorgan Chase & Co.’s hedge-fund sales desk, shooting down a report that highlighted risks in the nation’s housing market.
Home values may drop 5 percent to 10 percent due to an oversupply of apartments and tighter lending by banks, Sujit Dey, the desk’s executive director in Sydney, said in a note to clients. They are unlikely to slump by 50 percent, as two hedge-fund managers had suggested last month, unless there were sudden increases in mortgage rates and unemployment, he wrote.
“Shorting the Australian housing market has been a widow-maker trade and I think it will continue to be the case,” Dey wrote in the note. “Australia is a unique housing market and sometimes offshore investors don’t realize the key differences,” he said, pointing to factors including tax breaks that spur demand.
That is at odds with Jonathan Tepper, chief executive officer at research firm Variant Perception, who has grabbed headlines since predicting a drop of as much as 50 percent in Australian home prices. That view helped send the cost of insuring the debt of the nation’s largest lenders surging by the most in four years. Australia & New Zealand Banking Group Ltd., Commonwealth Bank of Australia, National Australia Bank Ltd. and Westpac Banking Corp. have an 80 percent share of the nation’s A$1.5 trillion housing market.
Share Price Falls
Australian lenders, bestowed with a six-year record profit run and low loan defaults, have seen their share price suffer as investor concerns over the fate of the housing market and higher capital requirements come to the fore.
Dwelling values in Sydney, the country’s largest city, hit record highs last year before notching up their biggest quarterly drop in four years in the final three months of 2015 as a regulatory crackdown pushed up mortgage rates, denting demand.
JPMorgan’s Dey said tax deductions on interest paid by landlords would continue to underpin demand, while full-recourse loans mean Australians can’t “walk away” from their home and “get away with it.” Australian households have among the highest savings rates globally and opt for interest-only loans for convenience, he said.