Beware overexposure to property as banks fall in the housing basket

With banks vulnerable to a property downturn, the portfolios of older investors are becoming heavily weighted to housing.

Robert Gottliebsen makes a point during a special event for SMSF investors hosted by The Australian on March 15. (Jane Dempster/The Australian)

Do Australians hold too big a proportion of their superannuation and other savings in banks shares?

Nowhere else in the developed world do banks represent such a large proportion of the stockmarket and retail investors’ savings.

A warning of the dangers came this week when NAB raised its home loan mortgage rate slightly. While it might increase profits, highly-leveraged Australian are vulnerble to higher rates.

The four largest ASX companies are all banks.

At The Australian’s Building Wealth seminar this week, the danger of holding too much of your portfolio in bank shares was strongly debated.

And I was also yarning with Lazard’s Australian equities portfolio manager Phil Hofflin who believes that, in the current environment, Australians should limit their exposure to bank shares.

Hofflin is concerned that Sydney and, to a lesser extent, Melbourne dwelling prices have reached a point where they carry a much higher level of risk than in past years. This is a view endorsed by the Reserve Bank.

Banks have ridden the housing boom with a vengeance and indeed their generous lending on housing has helped fuel the boom. Any serious setback in the housing market is not good for bank shares.

So, in a strange way, older Australians, with their high level of bank shares and their major investments in residential property via their homes and often holiday houses and investment properties, have a huge proportion of their assets in the same broad market.

It’s not so much a forecast of an imminent disaster but a “too many eggs in one basket” issue.

Yet banks shares have been absolutely wonderful for Australians in retirement. At a time when savers have been punished with lower and lower bank deposit rates, they have been able to invest in bank shares and continue to receive high income boosted by fully franked dividends. And there have been capital gains as a well.

Those who originally had a more diversified portfolio have found their mining stocks, like BHP (which rose above $40 at the peak) fell and their bank shares rose, thus concentrating their portfolio into banks to a greater level than was planned when the portfolio was structured.

And selling bank shares often involves paying capital gains tax and usually lowers the income of the portfolio.

Around the world there are countless precedents for housing price falls being accompanied by tough times for bank shares.

Given its nervousness about the housing market, the Reserve bank is trying to limit the damage to banks should there be a drop in housing prices.

And, so, it clamped down on Australian banks lending to Asian investors who had bought apartments off the plan. But that left the banks exposed to greater danger in their loans to apartment developers. All the banks have now lowered the amount they will loan on a dwelling from 95 to 90 per cent.

Some elements in the Reserve Bank would like it to go lower.

Interest rates on investor loans have also been lifted and that’s now spreading residential mortgages, as we saw with yesterday’s NAB hike.

These moves all designed to lower risk in the banking sector. But they are also a recognition that the Reserve Bank believes that the banks have taken too great a risk to lift profits and pay high dividends. One of the great concerns of the Reserve Bank is that if global rates increase, then, over time, that will increase the bank costs of overseas borrowing or, worse still, the Reserve Bank might be forced to increase Australian rates.

In such a situation, a large number of bank housing borrowers will struggle. Even if they maintain their higher payments, their huge borrowing to buy houses will force them to slash other spending which dampens the economy which flows back into bank business lending and bad debts. This is what happened in Japan. Higher rates are a danger to banks in the current circumstances.

And then of course, we find that the major banks have created chaos in their small business lending agreements by not changing their agreements in a way that conforms to the unfair contracts act.

It is a sign of management weakness (Banks need to fix unfair contracts mess in order to avoid royal commission, March 14).

I am not forecasting an imminent fall in bank shares but many Australians need to recognise that, partly by accident, they have become much more exposed to the one market that is normally prudent in a well-diversified portfolio.