Those in Australia would be familiar with the saying “safe as houses”.
It’s the mindset that even in the most shaky of economic times, the store of value in your house will remain safe. Stocks, currencies, commodities and bonds can all collapse, but when it comes to Australian housing, that doesn’t apply – a curious mentality despite it being just another market as well.
While the mantra of “safe as houses” is questionable – just ask those who were buying property along the US west coast in late September – it is understandable why so many Australians believe it to be true.
Generations of Australians have enjoyed nothing but rising house prices. From the 1950s, there has been a relentless march higher. Recessions, soaring inflation and the near collapse of the global economy in 2009 came and went but Australia’s residential property market continued to push higher.
Its Teflon-like nature has seen buyers willing to pay more and more to secure a slice of this security — an asset that many perceive to be almost risk-free and, over generations, has continued to increase in value, both in nominal and real terms. Debt levels have increased, significantly outstripping wages growth, leaving house prices compared to household income at the highest level on record.
Australians, despite the perceived risks of using increased leverage to get a piece of the action, remain unshakable fans of residential property.
Damien Boey and Hasan Tevfik, research analysts at Credit Suisse, aren’t so easily convinced. It’s not a risk-free asset, they say, it’s currently a riskier proposition than Australian stocks. And Australian stocks have fallen close to 13% since mid-April.
So how exactly have the pair come to this conclusion, particularly given the performance of the two asset classes over the past decade?
Using the monthly Westpac-MI consumer sentiment report, the researchers compared home buyer sentiment readings towards the residential property market across the various states and territories, plotting them in a chart measuring the dispersion of views across the country.
Dispersion is a way of describing how spread out a set of data is — in this case, sentiment towards the outlook for the property market — with a higher reading indicating a wide variety of responses.
As the chart from Boey and Tevfik reveals below, while dispersion has come off the highs of September, it remains high from a historic basis.
It also shows that measures on sentiment towards the property market have rarely been this varied across the country.
“We use the dispersion of sentiment readings across states as an indicator of housing market risk,” the research pair said.
“Our thesis is that the more fragmented the national housing market becomes, the more uncertain people become about housing as an asset class.”
Boey and Tevfik note the decline experienced in October was largely due to sentiment in other states converging with that expressed in New South Wales, something that has fallen heavily in recent months.
Combined, they suggest the fall in dispersion — in their opinion still high enough to indicate an increased housing market risk — reflects the Australian population is becoming more certain of a housing market slowdown.
To evaluate the risk in residential housing compared to Australian stocks, Boey and Tevfik take the dispersion chart and overlay it with the ASX VIX index — a measure of investor sentiment towards to the outlook for stocks that is derived from options pricing.
The VIX index is, by some, referred to as an “investor fear gauge”, with higher readings indicative of heightened levels of risk aversion based on greater levels of uncertainty.
Can you see the pattern?
Both gauges measure uncertainty over the outlook for asset classes – the dispersion chart for property and the VIX index for stocks. As you can see in the chart below, at present, the dispersion measure is currently higher than the VIX, indicating greater levels of uncertainty, something that Boey and Tevfik suggest indicates greater levels of risk.
While Boey and Tevfik admit their analysis will attract criticism, confessing that from a technical standpoint their measure of dispersion measures sentiment risk which differs from the VIX — a forward-looking indicator of stock price risk – they believe the two metrics are comparable.
“We have confidence that home buyers sentiment dispersion is indeed a forward-looking measure of price risk, comparable to the VIX – even if it is not conceptually the same thing,” they wrote.
Boey and Tevfik believe the higher dispersion reading for housing sentiment, compared to the VIX, suggests housing remains riskier than stocks, something they put down to housing investors experiencing a “value-at-risk” shock given recent substantial price gains and deteriorating housing sentiment.
And while it may create even more controversy than their baseline call, particularly given the asset markets that Credit Suisse specialise in, the research pair believe investors should be looking to shift away from housing into other asset markets.
“We maintain our view that the change in housing risk profile should contribute to a shift in investor asset allocation away from housing and into bonds and equities,” Boey and Tevfik said.
“It may even contribute to housing investors de-leveraging. Within the equity market, the increased correlation risk with housing means that investors should tread with caution around housing-exposed stocks, where valuations are yet to reflect the rise in risk.”
So, essentially, get out property and into stocks and bonds.
Let the debate between the property, stock and bond bulls begin.
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