There’s been increasing talk, again, about Australia’s housing bubble. Some of it has some validity, such as the big price rises, some of it is gross ignorance, especially among offshore commentators, such as The Economist, which is a frequent raiser of the issuer (but so far Australia has not had the collapse that it forecast).

They all forget that Australia has full recourse housing loans, unlike the US, there’s no tax deduction for owner occupiers (unlike the US) and we having continuing strong demand for new and used houses, and low unemployment,  unlike the US, UK, Ireland and Japan and many other countries where there have been a collapse or weakness in the housing sector.

But is this recent upsurge in concern about Australian housing prices (especially from the US where some investors have run out of money-making ideas) real, or due in part to other factors?

There seems to be a serious lack of disclosure in many of the claims and commentaries and their sources.

For example, there were two more stories in the Fairfax business pages today on the current story de jour, the attempt by the Commonwealth Bank to knock down these offshore claims about the bubble.

This was the standard news story.

“The Commonwealth Bank’s global mission to reassure investors of the health of the Australian property market continues to attract attention, with claims the bank had been selectively quoting data to support its case.

“Investment forums and housing blogs were alive with talk yesterday that an 18-page presentation used by the bank had replaced unfavourable housing affordability figures with data showing housing costs were not out of step with other cities in the world.”

And a much longer, turgid offering with comments such as this:

“But the lack of detail in the presentation is quickly forgotten as CBA’s arguments sink into a fallacious morass. According to the bank, ‘Australia is the fourth least densely settled country in the world — 83 per cent live within 50 kilometres of the coast’.”

In both stories, as in all the others in recent months (and especially since claimed American guru investor Jeremy Grantham launched the latest blitz in June) there has been no mention of the role of hedge funds, until now and this morning’s Sydney Morning Herald, where the Insider columnist, David Symons wrote:

“The decades-old debate over Australian house prices has only intensified this year, but hedge funds punting that a bursting bubble would take the banking sector with it are losing patience. They’re rushing for the exits before they lose their shirts.”

It has been an open secret for months that overseas investors, particularly US hedge funds, have been shorting Australian banks in anticipation that the combination of wholesale funding cost pressures and an imminent crash in residential property prices would be explosive.

According to Southern Cross Equities, Westpac and National Australia Bank have attracted most interest from the hedge funds.

But to date there’s been little joy for the doomsayers, and it’s costing them dearly.

While bank funding costs have crept a little higher, that’s attributable mostly to local competition for deposits rather than rising wholesale funding costs. Similarly, there’s no sign of house prices moving rapidly into reverse.

The absence of bad news is fuelling strong share price growth for the banks. While the ASX200 is up 6.2% in the past two weeks, the banks have been stronger. Measured in greenbacks — the currency that matters to a US hedge fund — the big four banks are up 15%-19% over the period.

Institutional dealers report that speculators have started buying back shares to close out short positions, contributing to the bank sector rally. Goldman Sachs told clients yesterday that US hedge funds closing out their short positions would underpin the performance of the Aussie banks for the rest of the year.

It’s a trend that will accelerate if the Australian dollar continues to rally, adding to hedge fund losses.

With the Australian dollar bouncing above 94 US cents overnight, these claims are not being believed or worrying foreign investors, especially in Australian government, corporate and third-party sovereign debt, which are being chased here for the high yields they offer.

Those forex losses are now hurting the hedge funds, many of whom have had positions for months, who bought at levels 10% or so under the current level of the dollar.

According to Symons, Goldman Sachs (who you’d reckon would have a good handle on all of this) says US hedge funds (surely not Jeremy Grantham’s GMO group in Boston?) are going to be influencing the share prices of the Australian banks in coming months as they close out their short positions and retire to the sidelines. Being short at lower prices, and facing the impact of the higher dollar, some of these so-called gurus are facing nasty losses indeed, which will rise as they are forced to buy bank shares to cover their sales. The cost of renting shares from idiot fund managers is also hurting them (That’s if they have covered, and not the illegal n-ked shorts).

And why haven’t other brokers revealed that in their recent statements on this bubble? The absence of a fully informed market or a fully informed research note (pointing out how the doom and gloom bubble claims would benefit hedge funds and their positions in the Australian banks) would have provided an offset to some of the sillier, sensationalist claims.

There’s nothing wrong with exploring the issue of high home prices and their impact on our banks and the economy, just that the claims have to be given full context.

Is this rumourtage, as defined by ASIC. Would it know or care?

Why doesn’t ASIC monster an analyst and ask why their recent comments did not point out the short positions of hedge funds in Australian banks?

Shouldn’t we have a bit of sunlight here? A good effort by David Symons this morning.

Peter Fray

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