What would a housing crash do to stocks?

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The local property market has become Australia's favourite topic of debate. It seems everyone has a view and just last week UBS released a research note calling the top for Australian property. So for equity market investors is this something to be concerned about or is it just making headlines?

Rhett Kessler from Pengana Capital and Ben McGarry from Totus Capital share their views on how a meaningful downturn in the property market would impact Australian shares.

"House prices going up are like an elastic band stretching. At some stage it has to snap back"

Key Points

  • Prices are high but it has always been this way in Australia. There are pockets of the market that appear more vulnerable than others – particularly in the apartments market.
  • If there was a big correction in the housing market there are potentially some significant ramifications for equity markets.
  • There are many East Coast businesses that have benefited from the strong housing market. Banks are particularly exposed, as are retailers.
  • Rhett Kessler is concerned about the number of people caught in a difficult situation and needing to draw down on their mortgages. This source of funding has been increasingly available as house prices have been rising. If property prices turn they could find themselves in a difficult situation.
  • Both panelists are currently long bank stocks, however, they also recognise that there are potential for headwinds to emerge.
  • Equities are likely to struggle should there be a meaningful housing correction given how many businesses have benefitted from the strong housing market.
  • Kessler says it is important to think about what the catalyst for a correction could be. The two he singles out are rising unemployment and rising interest rates.
  • To insulate his portfolio McGarry currently has a 25% exposure to US stocks and is avoiding highly cyclical retailers like Harvey Norman and JB Hi-Fi. Cash would also be a good alternative during a housing market correction
  • Kessler is looking to hold companies that sell products that people will buy regardless of the economic environment. He gives the example of utilities such as gas and medical service providers.

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