How to Exploit the ‘System’ — The Housing Finance Complex

Australian Housing Finance Complex - Bank Lending for Property

Pity the poor retail investors that jumped into Aussie bank stocks ‘with both feet’ as reported a few weeks ago.

They’ve just been bitch slapped. You can’t say you weren’t warned.

NAB is proving the case as to why this merry morn.

The big bank has come out and said it’s raising $3 billion in capital at $14.15 and cutting the dividend down.

It’s going to its shareholders for $500 million more too.

The institutional capital raising is at an 8.5% discount to last Friday’s closing price.

You don’t need me to tell you the reason.

Profit Watch has made the case recently to stay away from buying ‘the dip’ in the Aussie banks.

All eyes now turn to ANZ.

Its latest announcement is due 30 April…

The housing-finance complex exposed

Greetings from my writing cabin. The Victorian lockdown continues.

Does it make a great difference to my day?

Strangely, not really. I’m still tracking the ‘housing finance’ complex each and every day.

I’ve been doing the same thing, in one way or another, since 2012.

You know it as the boom bust cycle.

It’s the interaction between property and bank lending that drives the volatility, and highs and lows of this cycle.

The economy — and your investments — are hostage to it at all times.

Currently, we’re in our expected 2020 drawdown.

Just look at your portfolio compared to three months ago to see why this information is vital.

It’s also one reason why I keep saying there’s no need to buy the banks yet.

There’s more of a ‘hump’ to get over yet.

That brings us back to ANZ.

A journo in the Australian Financial Review says broker forecasts for the stock price range from $12.55 to as high as $26. It’s about $16 now.

I pay little attention to these in general.

Here’s the comment I found funny though. The article continues…

Putting the COVID-19 crisis and APRA’s edict to one side, ANZ shareholders would still be aware of the structural and cyclical challenges presented by record low interest rates, muted credit growth, a reduction in fee revenues, continued compensation payments and general margin squeeze.

Indeed. We’ve talked about this stuff right here.

But hello! What DO banks have going for them?

And who is the geezer that thinks ANZ is going back to $26 anytime soon?

That’s an ambitious line of thinking to say the least.

I suppose we could say Mr Market makes a fool of our expectations often enough that we can never discount any possibility completely.

But the odds of that happening? Surely terrible.

However, we know politicians have one game in mind.

That’s to keep the current system going at all costs. What is this system?

Protecting property values and the solvency of banks, mostly.

This becomes blatantly obvious when it breaks down.

For example, the US Fed has already stooped to buying ‘junk bonds’.

The reserve bank here is funnelling cheap dough to the banks at 0.25%.

The regulator is generously saying that the banks don’t need to treat repayment ‘holidays’ as arrears.


In the US, when banks were going bad during the Great Depression, they had an eight-day ‘holiday’ too…so people couldn’t rip their money out!

Such a nice sounding word…

And what else do we have here?

Understand the system…then take advantage of it

A government spending like mad to prop everything up.

A reasonable estimate is for the federal deficit to be $90 billion this financial year and a whopping $160 billion next year.

Most of it is an indirect subsidy to the housing finance complex.

The government wants to ensure people don’t default on their mortgages primarily.

That would smash banks, the economy and the asset markets.

All the wage subsidies, tax and repayment ‘holidays’, cheap loans to the banks, etc are designed to prop up the system up until we go back to something close to normal.

The tab goes to the future via the national and state levels of debt.

Left unspoken in this discussion is the inequity of the system as it was beforehand.

COVID-19, perversely, is an opportunity to reform the system to something more just and sustainable.

Philip Lowe pointed this out in his recent speech.

Odds suggest he is wasting his breath.

Give it 12 months or so, and we’ll likely all be back to chasing the unearned income available via the property market, and using bank credit to do so.

Nothing from the federal response suggests any significant reform is on the table.

Once you understand it, you can potentially exploit it.

Best wishes,

Callum Newman Signature

Callum Newman,
Editor, Profit Watch

PS: Our publication Profit Watch is a fantastic place to start on your investment journey. We talk about the big trends driving the Australian Economy, such as the Property Market and most innovative stocks on the ASX. Learn all about it here.