The housing-driven downturn we have discussed through last year continues to develop,
albeit at a slower pace than we originally expected. The situation is deteriorating, though,
with building permits – the best leading indicator for housing – now falling at more than 10% YoY (left chart below).

The banks remain uniquely exposed to this major risk. The Australian housing sector is one of the most overvalued in the world, leading to the household sector being one of the most indebted in the world.

Since the US election, US banks have performed quite spectacularly, cleanly outperforming all other sectors. However, financials around the world have been dragged higher too, including in Australia. The right chart shows that up until last week, Australia banks largely kept pace with the MSCI World Financials. We think the recent 10% rise in Australian banks since last October opens a shorting opportunity for Australian banks, as the structural problems from the housing market tighten their grip (click image to enlarge).