I can't decide on which side of the housing crash/no housing crash fence I sit on.
On one hand, APRA has its pulse on the lending market and macroeconomic indicators like bad debts and unemployment are all looking reasonable. The Reserve Bank looks like it intends to keep interest levels flat for some time, since higher rates could put households under financial stress.
On the other, there's an increasing amount of anecdotal evidence that suggests the vulnerability of the housing market to a downturn:
Australia and New Zealand Banking Group (ASX: ANZ)
90-day home loan delinquencies have been rising. Investor delinquencies in particular are rising, which is concerning if investor loans are one of the primary drivers of house prices in major cities (as is widely hypothesised). An increasing number of borrowers are just paying their debts 'on time' with a smaller percentage being more than 1 month ahead on their loans.
Queensland and West Australian loans are looking quite ordinary. OK, I admit that that's not exactly new news – just about every indicator out of WA, including retail sales, is negative. Greencross Limited (ASX: GXL) is even selling fewer doggy chew toys there.
Next, there's this from Genworth Mortgage Insurance Australia (ASX: GMA) this morning:
"Genworth expects… for the full year loss ratio to be between 40 and 50 per cent." The loss ratio in the first quarter was 35% (up from 27% a year ago), so this suggests that losses in the housing market in the concerning regional areas of WA and QLD is getting worse. And there's this one, from the Reserve Bank of Australia, which shows consumption growing ahead of disposable incomes, and the savings rate falling:
Now, these charts have been cherry picked. Possibly all I'm doing is seeing random blips or isolated concerns in specific industries (mining towns in QLD and WA) and conjuring a coherent story where there is none. Even so, I would be very concerned if I saw anecdotal evidence mounting of a downturn in Sydney or Melbourne.
When I look at the amount of debt that fellow Australians carry, their low savings rate, their approach to debt (happy go lucky), and their high levels of consumption, I can't help but be concerned about the risks that some companies carry in the event of a rise in unemployment. I think it would be highly prudent for investors to consider how much of their portfolio is exposed to the lending industry (banks, mortgage brokers, other finance companies) and consumer discretionary spending, with an aim of looking to diversify into other attractive, and possibly more defensive, industries.
