At nine thirty last night, I sat in my allocated seat – G-6, in cinema ten of Event Cinemas’ Marion Megaplex. As a “renter class” citizen, I had just paid the budget price of $12.50 (Cheaper Tuesday) to see The Big Short, a true story of hedge fund manager, Michael Burry, who diligently discovered the American subprime housing bubble unfolding and boldly shorted it.
As the previews rolled, it became increasingly apparent I was the only one in this session. I had the entire cinema to myself. No chip packets rustling, no one chatting.
Waiting for the film to start, I pondered to myself. Why is the cinema empty? Is it a reflection of Australia’s complacency? Are any other cinemas in the complex, empty? Should I be shorting Amalgamated Holdings, the owner of Event Cinemas, instead of the banks? Just how much disposable income has our housing bubble leached from everyday Australians, that they can no longer afford cheaper Tuesdays?
And last, but not least… If a film is projected onto the screen, and there is no one to see it, does it still show?
Granted, I had taken 6 weeks to watch it. Had I not been overseas on the 14th January, when The Big Short opened on the big screens in Australia, I would have been eagerly in the audience that opening night.
But the timing was somewhat perfect.
Today, on the front page of the Australian Financial Review was an article by Anne Hyland. It was towards the bottom of the front page, where yesterday lobby group, the Property Council of Australia, had paid for a banner advert promoting the benefits of negative gearing (Don’t play with negative gearing), a tax incentive thought to be contributing significantly to Australia’s ballooning housing bubble. Hyland wrote:
It was like a scene from the film The Big Short. A hedge-fund manager and an economist pose as a gay couple on a combined income of $125,000 and tour Sydney’s western suburbs viewing housing developments and meeting mortgage brokers for research to determine if there’s a housing bubble.
The conclusion is it’s worse than they thought.
I could immediately relate.
As the story goes, a misplaced phone call to hedge fund manager, Mark Baum (played by Steve Carell) alerts him to a credit default swap being placed on the American housing market. Curious to understand why someone would short something as safe as houses, Mark Baum undertakes extensive research. He visits suburbs with high mortgage defaults, talks to mortgage brokers and interviews hookers with multiple investment properties funded by time bombed adjustable rate mortgages. Later he visits the American Securitisation Forum in Las Vegas and ratings agency Standards and Poor’s. The more he digs, the bigger the scale of the fraud becomes.
Had you watched 60 Minutes on Sunday night (Home Groans), you will already know what Hyland is referring too.
Australian based Bronte Capital’s chief investment officer, John Hempton has been showing founder of Variant Perception, Jonathan Tepper around town for the past couple of weeks.
Jonathan Tepper had predicted the housing bubbles in the United States, Ireland and Spain. In Spain, according to 60 Minutes, he was made enemy of the state for simply telling the truth.
During a weekend auction in Sydney, Tepper described the irrational frenzy as “mad”. “I’ve never seen anything like this in my entire life. This is truly crazy,” he remarked on 60 minutes.
Tepper says the price to income ratios for Australian housing is totally out of wack and predicts falls in house prices of between 30 to 50 per cent for Sydney and Melbourne.
“Have no doubt it will burst, the only question is when,” he told 60 minutes reporter Ross Coulthart.
The Australian Financial Review today reveals Tepper and Hempton has been touring suburbs across north-west and south-west Sydney, and has met with some 20 mortgage brokers. Mortgage brokers had repeatedly encouraged the two, posing as a gay couple, to lie on loan application forms about their income.
They have also spoken to many investors who were able to get revaluations on their investment portfolios to increase equity for further speculative property purchases. “We met one who was able to do this 20 times in a year with their property portfolio.”
Mortgage brokers were upfront what big four banks would revalue investment properties quickly. “They wanted to put you in 10 to 15 apartments. The only way they could do that was getting the bank to revalue the property so you could borrow more money. They were acute about which banks had bad practices.”
2012 Property Investor of the year, Kate and Matt Moloney featured predominantly in the 60 minutes report. They are now close to bankrupt, owing the banks millions. One of their downfalls were accumulating too many investment properties, too rapidly with little to no equity.
According to the AFR, “Tepper writes of getting a ride with an Uber driver who said he had his own house, had bought five investment properties in Queensland with no cash deposits, and went guarantor for his daughter who bought a $2.2 million home.”
In Tepper’s report, he warns “Australia now has one of the biggest housing bubbles in history”. Australia’s real estate assets to GDP is now 3.8 times. Ireland and Japan, two of the world’s largest housing bubbles in history, had multiples of 3.5 times at their peak.
Hempton discloses has a short on the Australian housing market. Tepper has told 60 minutes, he will probably do the same.
» Uncovering the big Aussie short – The Australian Financial Review, 24th February 2016.
» Home Groans – 60 Minutes, 21st February 2016.
» The charts that suggest the housing bubble is out of control – The Sydney Morning Herald, 24th February 2016.