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Shorting the Australian Housing Market - Make Money From Property Crash; Short the property market
Topic Started: 14 Apr 2011, 07:33 PM (20,959 Views)
Alright Jack
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Chris has been trying to get this product off the ground for years. I don't know what makes him think it will work this time when it didn't before.

Here's an article he wrote in 2009.

http://www.businessspectator.com.au/bs.nsf/Article/ASX-to-launch-house-price-risk-market-pd20090515-S2V69

For anyone thinking of shorting the housing market, there are a few other ways to do it. You could short the banks, property developers, or LPTs. It's quite difficult to short property because it's such a slow moving beast, but there are other ways to do it if you've got the time and the inclination, rather than relying on a non-transparent hedonic index.

AJ
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Get some PUTS on Stockland. Look for November December offers.
Mine, purchased last year are looking like areally good return.
Basically you do you dough if the share price rises and win if it falls, without having to buy the actual share.
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Sherlock
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Link -- http://www.smartcompany.com.au/property/20110615-why-we-need-another-way-to-invest-in-housing.html

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Why we need another way to invest in housing

Wednesday, 15 June 2011 00:00

Christopher Joye

Tired of the drudgery of finding, buying and managing an investment property? If the Australian Stock Exchange’s plans come to fruition, you will soon be able to get exposure to Australia’s $3.5 trillion residential real estate asset-class without buying a home, paying stamp duties and land tax, or bearing the burden of maintaining and overseeing your property.

In fact, rather than investing in one home, with its many idiosyncratic risks (eg., the local zoning, economic activity, and the specific pros and cons of the dwelling in question), you will be able to buy an exposure to an exceptionally well-diversified portfolio comprising literally millions of homes spread right across the country. And you will not own any of them. Seriously!

Perhaps most interesting of all, you will be able to make this investment for as little as about, say, $10,000. That is, one-fortieth the cost of buying a median-priced property outright. Over and above professional investors, this could be very attractive to mums and dads stuck in the rental market who are worried about the costs of home ownership outpacing the interest they earn on their savings.

Another benefit of these new products will be that they are likely to afford users superior “liquidity” – put differently, a better ability to enter and exit your holding – than the many months of inconvenience one can experience when disposing of a home.

How will this be possible? My best guess is that within the next six to 12 months Australians will be able to invest in capital city, or even national, residential property “index funds” available through the ASX, which will offer the capital growth and net rental returns generated by houses in those cities. This will be similar to putting money in an index fund that tracks the performance of the Australian sharemarket index. The key difference is that returns will now be tied to a house price index.

The ASX’s market has been some time in the making as it gets the various approvals and the capital city and national house price indices ready before the formal launch. But it should happen relatively soon.

Index-linked portfolios have two chief advantages. First, they offer vastly greater diversification than owning an individual share or residential property, and this means that they should have lower risks, all other things being equal.

When Rismark measures the risk of a typical single-family home in Australia over the last 20 years or so, we find that its returns vary by around 15 to 20% per annum. This is on par with the risk you see in the sharemarket. In contrast, a nationally diversified house price index has radically lower risk, with volatility of just 3 to 5% per annum.

The second obvious advantage of index funds is that they tend to have much lower costs. For example, an active Australian equities managed fund that buys and sells a concentrated portfolio of stocks often charges its investors 1 to 2% per annum. Index-linked funds, on the other hand, have fees that are a fraction of this.

I expect the same to be broadly true in the residential property space. The new index-linked products should offer investors total costs that are significantly lower than owning an investment property outright, and with much less day-to-day hassle.

A final important opportunity associated with these products will be “risk management”. About 60 to 70% of all household wealth is locked up in residential housing. It is often the single largest investment many families make during their lifetimes.

Yet there is currently no way to insure against the risk of major house price falls. With so much talk swirling around house price bubbles, there are presumably many households out there that might like to take out a bit of insurance against the risk that their most important investment plummets in value. This is all the more germane in a rising interest rate environment.

In addition to going “long”, or investing in, the index products I have discussed above, you will also be able to take the other side of this transaction and go “short”, or benefit from a fall in the value of the index. So if, for instance, you are worried about Melbourne house prices declining, you will be able to sell the Melbourne index and thereby realise positive returns if your anxieties prove correct.

Opportunities to hedge, or reduce the risks associated with house price falls, have for a long time been recognised as one of the biggest “missing markets” around the world today. This point was hammered home during the global financial crisis, when US and UK house prices declined by 30% and 15% respectively. And in the US and UK, index-linked residential property markets have been successfully established, allowing institutions to reduce the risk of house price falls.

Looking through the cycle, why might one choose to allocate a percentage of a portfolio (e.g., your self-managed super fund) to an index Australian residential property?

As I noted above, residential property is Australia’s largest investable asset-class and about 2.5 times the value of all securities listed on the ASX. Yet investors currently have few ways to invest in it on a truly “diversified” or cost-effective basis. Round-trip transaction costs can frequently be between 12 and 13%. And while you can buy an individual home, you cannot currently get access to a portfolio of housing that has exposure to every city in Australia.

A national index of residential property has low measured risks and has historically displayed about one-fifth the volatility of Australian shares, which has traditionally been the most popular holding in investor portfolios.

On a risk-adjusted basis, residential property has, as a consequence, actually outperformed Australian shares, global shares, 10-year Australian government bonds, and listed property trusts over the past 28 years, which represents the longest period over which we can credibly compare returns.

Australian housing has also proven to be a resilient performer throughout all of the major crises over the last three decades, including the 1987 stock market crash, the 1991 recession, the 1997-98 Asian and LTCM crises, the 2001 tech wreck, and the 2007-09 GFC.

During Australia’s last severe recession in 1991, when unemployment rose from 5.6% in December 1989 to 10.9% in December 1992, an index of residential property generated solid positive capital returns (returns were higher inclusive of net rents).

Since 1982, a national index of residential property’s rolling three-year capital or total returns have never entered negative territory. And during that especially turbulent episode between 2007 and 2010, a nationally diversified portfolio of housing significantly outperformed Australian shares, global shares, commercial property, hedge funds and private equity.

In recent times, Australia has had among the strongest population growth in the developed world, with the Treasury projecting that our population will rise by 16% between 2010 and 2020 to 25.7 million people, and increase to 35.9 million people by 2050. Treasury and ABS forecasts indicate that Sydney and Melbourne will each have about 7 million to eight million people living in them within four to five decades.

As the population expands in metropolitan markets it is becoming increasingly difficult to bring new housing supply online, as evidenced by the flat absolute volume of housing starts over time. ANZ and Westpac estimate that Australia’s current underlying housing shortage is around 200,000 homes and rising.

This is why independent experts, such as the National Housing Supply Council and the Commonwealth Treasury, forecast that robust housing demand coupled with continued housing supply constraints will result in a growing structural shortage in the national dwelling stock.
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viper
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davede
14 Apr 2011, 07:33 PM
Hi all,

I'm quite new to forums and all. :bye:

The more I peruse the various threads and posts around the property forums the more I come across a dedicated hard-line base of property crash advocates.

They make some compelling and interesting cases for their arguments and I am always happy to read and to learn.

What I thought may be more useful or to provide a bit of help to investors is providing some means or advice to make money if a crash were to occur.

This topic is not meant to incite any rioting etc.

I think it would just be genuinely helpful to discuss ways to profit from a property crash and what instruments, securities or methods any crash advocates have set up to help them do so.

Again, I don't intend to incite any controversy here.
I came across you post while exploring for ideas of how to short the Aussie residential mkt. There are many listed options for commercial as many reits own the underlying assets, but it has always seem problematic in shorting the so call overvalued residential market.

Here are a few thoughts (I apologise if some have been covered as i haven't read all the posts)

The obvious trade is to short the banks, or for retail investors buy puts white call etc. However, how much bang for your buck do you really get and how crowed is the trade already. I have seen hedge funds put on this trade in size only to take it off 5-15% later (sure a good hedge again your house, but not the "big short". Commonly every large equity house has some of this price in and from the numbers i've seen the estimated downside is probably a further 10-15% on the where they are now. in addition, the subprime part of the market is issued with LMI.

The builders are also a good sector....BLD, CSR and ABC are standouts given they are overweight AUssie housing vs JHX (more US). However, pulling up a chart of any four you will see a lot has been priced in. BLD still my preferred pick give its earnings are currently being held up by the strong AUD which benefits its USD earnings.

THe AUD? more of a macro bet i think. As a fail fx trader i would advise against it and the only way to get the leverage is to leverage...big time. If rates are going up, the housing mkt will be soft, but higher rate will drive a higher interest rate differential which should support the AUD carry.

So where does this leave us?

Retailers - short the 2nd derivatives. HVN FAN
Banks - still a solid hedge, but stick with the regionals with lesser balance sheets.
Or you can think outside the box and go offshore...working on an idea to go long puts for a mortgage insurer listed offshore. THey issue the mortgage insurance for that AUst banks make low quality borrow buy and capitalise to the loan. The problem is get a pure play. (let me know if you have any ideas or have interest in collaborating)

Sense of time?
there are many articles out there tracking the fall in housing prices in aust, but with currently stock mkt volatility and the prospect (albeit a gamble) of QE3 now might not the the time.
so what to look out for? Commodity prices both bolks and listed.
Our entire economy is supported by exports of commodities...no coincidence that WA has had the sharpest housing price falls.
Observe a 2ble digit fall in Iron Ore prices and that is cause for concern.

apol for the spelling and grama mistakes...have had a cple






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carter
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Tasman Vagrant

viper
30 Jun 2011, 10:32 PM
I came across you post while exploring for ideas of how to short the Aussie residential mkt.
Great first post, welcome to the forum viper. Some excellent ideas there! I've been seriously considering shorting Westpac, but I'm worried about the downside risk. The problem is the level of support the government gives our banks. At the first whiff of trouble last time, they stepped right in and guaranteed the banks, and at the same time they introduced bans on shorting the market. Not really a level playing field for us bears, sadly.
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Admin
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Hello Viper, you must have hit "report" instead of "reply". Here is your post:

Quote:
 
Reported by viper @ 50 minutes ago Reason

the RBA has many bullet to fire given rate are among the highest in the developed world...plus we have an irrational government. However, i would not be discourage as a bear. Personally I'm programmed to be a bull given my equities background, but there appears to be a serious imbalance in housing affordability. In addition, i can not ignore the similarities between the spending patterns of American and ourselves. I am not 100% sure of an immanent housing crash here despite the data, but an worried enough, and am greedy enough to want to be prepared to exploit the possibility.

In terms of shorting WBC, let it run up a bit (plenty of short covering atm) and look around for OTM cheap puts...we will get an S&P downgrade soon too.
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jrsnr
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carter
30 Jun 2011, 11:16 PM
Great first post, welcome to the forum viper. Some excellent ideas there! I've been seriously considering shorting Westpac, but I'm worried about the downside risk. The problem is the level of support the government gives our banks. At the first whiff of trouble last time, they stepped right in and guaranteed the banks, and at the same time they introduced bans on shorting the market. Not really a level playing field for us bears, sadly.
Have you considered mortgage insurer's?

Got to remember that Australian banks force anyone with LVR greater than 80% to pay the bank for LMI. So if ever these high LVR properties sell into negative equity the banks 'no worries mate' as long as the mortgage insurer pays up.

Also, I would have expected that it would take fairly significant falls to hit the people with 20% or greater deposits (i.e. uninsured mortgages), especially considering this portion may have had a good buffer period in which they have paid down principal. And even so I'd expect these people to be rather adamant to hold onto their properties considering the amount put into them.

The biggest endemic threat I see to Australia's residential mortgage market is through the mortgage insurers.
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viper
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jrsnr
1 Jul 2011, 01:05 AM
carter
30 Jun 2011, 11:16 PM
Great first post, welcome to the forum viper. Some excellent ideas there! I've been seriously considering shorting Westpac, but I'm worried about the downside risk. The problem is the level of support the government gives our banks. At the first whiff of trouble last time, they stepped right in and guaranteed the banks, and at the same time they introduced bans on shorting the market. Not really a level playing field for us bears, sadly.
Have you considered mortgage insurer's?

Got to remember that Australian banks force anyone with LVR greater than 80% to pay the bank for LMI. So if ever these high LVR properties sell into negative equity the banks 'no worries mate' as long as the mortgage insurer pays up.

Also, I would have expected that it would take fairly significant falls to hit the people with 20% or greater deposits (i.e. uninsured mortgages), especially considering this portion may have had a good buffer period in which they have paid down principal. And even so I'd expect these people to be rather adamant to hold onto their properties considering the amount put into them.

The biggest endemic threat I see to Australia's residential mortgage market is through the mortgage insurers.
jrsnr yes you are on the same page. the mortgage insurers issue the LMI (Lenders Mortgage Insuance)...problem is find a pure play with a big enough skew to Aust mkt

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PuntPal
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carter
30 Jun 2011, 11:16 PM
viper
30 Jun 2011, 10:32 PM
I came across you post while exploring for ideas of how to short the Aussie residential mkt.
Great first post, welcome to the forum viper. Some excellent ideas there! I've been seriously considering shorting Westpac, but I'm worried about the downside risk. The problem is the level of support the government gives our banks. At the first whiff of trouble last time, they stepped right in and guaranteed the banks, and at the same time they introduced bans on shorting the market. Not really a level playing field for us bears, sadly.
I agree Carter...if you are a housing bear, then it makes sense to target the Banks that have lent all the money to fuel the boom but then there is the question of bail outs.

It is important to think about what other countries have done...the deposit holders get bailed out, but the shareholders dont.

If the housing crash wipes out the banks due to the asset side of their balance sheet getting smashed - then I dont think the Government CAN save the shareholders

The banks will get indirect support, which may slow the crash of share prices...but they are going down even if the Government wants to help.

If the banks are nationilised, shares for CBA will crash from 50 to less than 5....

That is why I have put options as far as the eye can see...Expiry times from Dec 2012 until Dec 2013....strike price 26.

Giddeup!
"Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble." - Paul Krugman 2002

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jrsnr
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PuntPal
1 Jul 2011, 11:39 AM
It is important to think about what other countries have done...the deposit holders get bailed out, but the shareholders dont.

If the housing crash wipes out the banks due to the asset side of their balance sheet getting smashed - then I dont think the Government CAN save the shareholders
I guess it's a matter of perspective, but from mine the deposit holders do not get bailed out.

Firstly, you are forgetting one other important investor and that is the bond holder. As of recent I understand that banks have been given the go ahead by APRA to issue some new type of bond (forgot their name) where a pool of assets is set aside for those bond holders and is dedicated to their payout. But let's forget about these for the moment.

In general you are right, the structure of payout from liquidation of assets (for a bank failure) is deposit holder, bond holders (preferred followed by subordinate) and finally shareholders.

Now, I remember reading about some of the bank failures in Australia that occurred during the early 1890's. With respect to deposit holders it was such that when a bank failed that deposit holders were given a note stating what that bank owed to them. It was not unheard of in those 1890's bank failures for deposit holders to have to wait 20 years to get their money! I'd expect the time frame may have significant artifacts due to the banks long term lending nature, i.e. mortgages.

What I see that the government is doing by guaranteeing deposit holders is simply an issue of the government pays out the deposit holders now and then the government gets their money back after the actual liquidation of the bank assets. Put simply it is generally easier for the government to stump up the money and get it back later than for a retiree, pensioner, you or me to lose your life savings and have to eke out a living or possibly worse.

Admittedly this type of guarantee would probably cost the government interest in the event they needed to borrow money to cover the deposit holders, but it may be a better solution than having a couple hundred thousand very angry people, many who may have lost their life savings. People with nothing are desperate and do desperate things. People who have just lost everything are not just desperate they are angry, take a look at Greece to see see what desperate and angry people do!

It is in this respect that I do not consider that the government is bailing out deposit holders. In short they would probably recoup all of this money anyway. In most likelihood preferred bond holders would receive a haircut. Subordinate bond holders have a very high likelihood of being in the same boat as shareholders, that would be the boat at the bottom of the lake! Personally, if a person is not aware of the risk profile of the investment they are entering into then due diligence is lacking. Kind of makes you take a second look at the superannuation industry and it's preferred investment vehicle, i.e. the stock market!
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