How to short Australian property

After Chris Joye’s big short post yesterday, some readers wanted to know more about how to short Aussie house prices. There are a number of ways but note that this not investment advice.

The most obvious methods are to do what the MB Fund is doing. Get long government bonds and short the Australian dollar. Both of these will benefit if house prices keep falling. The former will see capital gains as the RBA is forced to cut. The latter for the same reason if you’re holding either foreign assets or cash. The MB Fund also offers an ethical screen that knocks all exposure to Aussie housing out automatically.

If you’re feeling more adventurous then the obvious place to go is the big banks. These can be shorted by borrowing their stock and selling it forward. Though this is complicated and expensive, not least because of the big dividends. You might also use futures or CFDs for the same end. My own view is that banks have plenty of downside left in them with current valuations at 12x forward ridiculous given the earnings and dividend risks.

The same argument can be applied to property services stocks like REA, DHG or GMA. These can be even more attractive than bank shorts given most have lousy dividends and high (often tech-like) valuations.

Then there are the building stocks which will are already getting smashed. Though you want to be careful to avoid those that have exposure to infrastructure.

There are also the LICs and REITS. These have been powering higher as bond yields fall. Most are exposed more to commercial than residential property. My own view is that these will also roll over in time as the economy sours, especially those exposed to retail space, which is already weakening.

I was surprised to find only one LIC specialising in mortgage bonds on the equity market: GCI. But it does appear to be deep into junior tranches of RMBS with only 3% AAA so it is a juicy shorting vehicle if you can borrow the stock. Then again, these kinds of highly illiquid firms tend to lock up when things turn south.

Finding actual mortgage bonds to short is more difficult, just it was in The Big Short. You need access to ‘over the counter’ (OTC) deal arrangements with somebody to take the other side of your bet. It’s not for the retail investor.

More broadly, what all of these ideas suggest is how stupid the RBA has been to let the correction run unabated (not that it should stop it but certainly slow it). If RMBS downgrades or bank capital reaches a tipping point before monetary policy is eased then it will already be too late to stop the so-called “orderly”correction from turning into an outright crash as markets smell blood.

Comments

  1. I note that during the GFC, shorting banks was banned for a while in Australia. I don’t know how this would have affected shorts already in position or if only new shorts were banned. But still, this sort of regulatory risk worries me, knowing the powers that be do not love shorters. I am happy for now with option A (bonds plus USD plus a tshirt saying “I’m short your house” to wear to BBQs).

  2. Some interesting ideas will check out what can be done on ig index today (very small positions mind)

    My very small 10yr bond position +2% in 5 days be interedting to hear how arrow is going

    • Yes, about that and slightly more on the 15 year bonds (+2.6%). Nice buffer to have, anyway, and they haven’t even paid a coupon yet!

      Those who got in three or four months ago are the real winners though…

  3. Interesting that I said this about Joye on MB, the day before his “shorting” post.

    https://www.macrobusiness.com.au/2019/03/clash-of-the-mites-joye-versus-adams/#comment-3319396

    “…I have a sneaking admiration for the guy, I think he understands property markets and the economic cycle like the very best of the global 0.1%’s advisors, and I suspect he will emerge from the coming bloodbath smelling of roses, having cashed out at the right time and even done a bit of smart “shorting”. Just like the global 0.1% who are playing the establishment for suckers with their conspiracy of anti-sprawl urban planning, QE, and mass immigration…”

    • I also said: “…Personally I think a lot of Joye’s behavior is explainable by complex psychology since he was the main author of the PM’s Task Force Report on Housing Affordability in 2003. He absolutely nailed it; no-one since has produced anything of that level of clarity and comprehensiveness. It should have established him as one of the best policy advisors around. Impressive given how young he was.

      John Howard rejected the report out of hand on the basis that the voters liked their house values going up, thanks.

      So everything Joye has done since, needs to be viewed through the possible interpretation that “if Australia won’t listen to good sense, then stuff them. I’m looking after number one from now on”. This has major explanatory power, to me…”

      And: “… Joye isn’t a knowing agent like the global 0.1%, he’s just spotted what’s up; and if his fellow citizens don’t want to know about it, why should he go down with them?…”

      • “if Australia won’t listen to good sense, then stuff them. I’m looking after number one from now on”

        Ahhhhh, that just sounds like me.

      • A surly John Howard PM when asked about housing affordability “Nobody is complaining about their house going up”

        But they sure do b!tch about it on the way down.

  4. What about long dated bonds in the us?Would you get upside as interest rates are lowered in America as well as currency upside?is there an etf on the asx that would allow access to such an investment?

  5. What about put options on banks (and some of the other real estate industry names you mentioned)? Better for the amateur investor than CFDs, all you can lose is the premium paid for the option itself.

  6. So 2 years into the correction, with many indicators flashing we could be at or near the bottom in a standard cycle, there are retail investors who don’t know what they are doing wanting to load up with short positions?

    Maybe they’ll get lucky and ‘it is different this time’ (end of a larger, structural cycle), but it sounds an awful lot like a contrarian indicator.

    Macrometer woo woo woo

    • That’s a timely warning that I completely endorse. Monetary and fiscal stimulus are coming.

      That said, you will note I’m simply following CJs lead here and you’re an arrogant toss pot.

      • Have a look at all the charts Leith does around transaction volumes, finance, price, etc. Where’s the ticker on the y-axis now compared with past corrections over the past 20 years?

      • proofreadersMEMBER

        HnH – so, at the current Aussie govt bond rates, each 10 bps decline generates approx what capital gain – 100 bps (1%)?
        Therefore, you need to leverage (eg triple?) the play to get a Reusa vibrancy moment? (None of the foregoing is investment, financial or relationship advice!!)

      • Proofreaders – the relationship between yield and capital value is moderated by number of years left to maturity, you realise, yes?

      • proofreadersMEMBER

        Peachy – fully aware of duration aspect, but was just looking for ballpark figures for this baked-in gift that keeps on giving. Any feel, in absence of guidance from guru HnH?

      • Proofreaders – I’m in a mix of maturities, but don’t watch so closely as to have rules of thumb to translate changes in yields to changes in capital values. It’s a bit tricky because something like a 20 year bond is impacted by the (expected) rates at 1 year, 2 years, 3 years and so on out to 20…. and the rates out along the curve don’t move in unison (so long end could rise while the short end could fall, etc)

        The basic maths to translate ytm changes to capita value changes for bonds of various durations is out there and easily accessible on the internets, of course.

        But you are looking at the slightly more advanced/complex issue of “duration”, really.

    • I agree shorting stuff in an environment of unnatural policy acts and desperate powers-that-be could be pretty fraught.

      But what indicators suggest we might be near bottom of the economic cycle? Serious question. Growth? Falling after a record long run. Unemployment? Record lows. ASX? Barely below 10-year highs.

      • I am talking property cycle indicators, see my comment above.

        I’m not of the view this couldn’t go a lot deeper, but the banks are already well down from their highs.

        Doesn’t seem like an ideal time to get short, especially if Labor gets in (likely) and gives investors 6 months to get into assets before NG/CGT changes + in conjunction with RBA rate cuts.

        But hey, you only live once… do it https://images.app.goo.gl/7JnoeXdkiZsYAaih8

      • You did say “economic cycle”.

        As for property cycle – first question is how long since we’ve seen a normal property cycle in this country? Not since 1991 recession I’d suggest. As for indicators suggesting a bottom, which ones? Auction clearance rates and volumes worsening again. Credit crashing, increasingly fast. Prices accelerating downwards again after falls slowed (but didn’t stop) earlier in the year. Sentiment worsening but still largely buoyant, no real panic.

        Sounds to me like we’re definitely over the top crest of the roller coaster and rolling fast but no further down than that. Nobody’s even has their glasses fly off yet And the fat kid in the back row is only just starting to wonder if those two burgers and double thick shake were a good idea.

      • “You did say “economic cycle”.”

        Where?

        Let us know what you’re short so we can measure the performance 🙂

      • Yes yes, Joe. We get it, go long property, new boom about to kick off anytime now, etc etc…

        Not sure why all the investors have spent the last couple of years on the sidelines waiting for Labor to get in, but there you go.

        Anyway, A2 has the truth of it, it’s not just a property cycle playing out. Longterm debt cycle dynamics at play, R word etc etc.

      • Ok, correction, you said “standard cycle”. Mea culpa.

        I’m not short anything, read the first post of the thread 😁

      • One of my macro views is that most people I know are seriously in debt and very little wriggle room, huge stress, marriage breakdowns etc. I see their lifestyles going backwards and if unemployment comes up they are stuffed. I’m not sure of the real data on this is, but most analysts are forecasting low growth and how that plays out here with large population growth (employment) it’s hard to say, but shorting the AUD might be on the cards soon. Rather than shorting the AUD, look at ASX listed company that have lots of debt, falling revenue. Maybe rate cuts will help them, but not if the banks don’t pass the cuts on what follows? I’m feeling less confident in any strategy now though, but it’s something I’ve been looking at for 2019. Shorting the AUD IMO is a very tricky trade to get right…it might be correct, but outside forces always seem to put a floor under it. An outside event may make that floor drop though.

    • thomickersMEMBER

      no not a good idea to go long CCP/CLH before the crash. After the crash yes.
      They buy low quality debt/receiveables at a discount and the economic cycle revalues those books up or down.

      • Agreed. Increasing one’s financial flexibility is the best course of action heading into a crash.

        I have been unwinding my positions over the last 3 years or so. I still hold uranium stocks and I will keep holding them – their fundamentals are too good to ignore and my cost base is at or near the bottom. I also loaded up on tobacco giants after they crashed at the end of last year – their valuations were too good to ignore and they are USD denominated.

        Before the recent purchase, my financial flexibility was at its highest in more than a decade. I still have enough ammo left at my disposal to strike when an opportunity presents itself.

  7. thomickersMEMBER

    rolling 1 month put options on ben/boq or wbc/anz/nab and hold CBA (bank best positioned to take a battering)

  8. Likely better off going long Gov suck holes,
    HVN for instance should do ok once Gov hands out the cash.

  9. If you didnt purchase in the past, and currently sitting on a big deposit, then you are already short the property market. Dont over complicate it (or risk your deposit), just make more popcorn, sit back and relax.

    • Agreed. Increasing one’s financial flexibility is the best course of action heading into a crash.

  10. Give me an FN break. Didn’t Dave and Leith give you the thumbs up on Magrath when it listed. It was like watching a ship launch all fanfare and hoo hah at the dock and in the harbour. Sinking on the maiden voyage. Cyclical or structural monetary or fiscal they are going to to throw the the kitchen sink and the kids/oldies under the bus if they think that is what is required. Safest short at the moment is at the bar.