Among other investors, it can be hard hard to be bearish on Commonwealth Bank of Australia (ASX: CBA). 'Hey, their shares just keep going up!' is a common refrain. My parents think Commbank is a great investment. "They earned $8 billion dollars last year, that's an obscenely large amount of money".
And they're right. Apart from a brief interlude during the GFC, Commbank shares have only ever gone up, and up…and up:
But I want you to consider two reasons why that is so:
- Housing boom:
- Ballooning levels of debt
27-odd years of unbroken prosperity have seen the Australian economy add 12,000 buildings per month, almost every month since 1992. They've mostly all been funded with debt.
At the same time, the amount of debt that households carry has skyrocketed. So banks have seen an incredible boom in the amount that they are lending, and the fees that they charge (e.g. on loan approvals). Parallel that with the boom in funds management and wealth products (partly due to superannuation) and the bank's growing profits make sense.
Yet it's not hard to imagine a situation in which these trends reverse. I wouldn't waste my breath calling the top of the housing boom – but how much household debt is sustainable? It's at more than 180% of household disposable income right now. Can it go to 200%? 250%? 300%? At some point you have to sit back and say 'these levels are disturbingly high and I am not sure I would be comfortable investing here.'
Because bank shares go up forever – until they don't.
