The Commonwealth Bank of Australia (ASX: CBA) share price is not a one-way ticket to riches.
Commbank: (not) as safe as houses
Commonwealth Bank of Australia is a $140 billion business, making it Australia's largest company, ahead of BHP Billiton Limited (ASX: BHP) at $120 billion and Westpac Banking Corp (ASX: WBC) at $102 billion.
However, while it's highly debatable, I think the tailwinds which drove the CBA share price from $6 in the early 90's to over $96 in March 2015 are not going to propel its share price meaningfully higher in the future. That's why I find it hard to believe CBA's share price is trading at a premium to the broader market.
House Prices
Unless you have been living under a rock (which would have been cheaper), you would have noticed that house prices in Melbourne and Sydney are at eye-watering levels. Perth, in all its mining glory, is at the other end of the spectrum.
House prices double every seven years!
Yeah, nah.
As former Motley Fool Columnist, Morgan Housel wrote in 2014; most Americans believed houses were the best long-term investment they could make – despite the GFC crushing that warped sense of reality.
Housel noted that between 1890 and 1990, house prices were basically flat once prices were adjusted for inflation. That's according to data from Yale economist Robert Shiller.
Flat, after inflation.
That's worth remembering the next time you punch into Google, 'how muc h kan I burrow?"
Economic Growth
Over the past 26 years, which is around the time CBA shares were made 'public' and listed on the ASX, Australia has experienced non-stop economic growth.
As Motley Fool Pro Adviser, Matt Joass, CFA, pointed out on Twitter some time ago, that was also around the time that Vanilla Ice released his smash single 'Ice Ice Baby'.
"Will it ever stop, yo…" — Most likely.
The economy growth engine will stop.
And perhaps sooner than many people care to admit.
Earlier this year, Australia surpassed The Netherlands with the longest ever streak of non-stop economic growth.
Interest Rates
Interest rates have fallen from around 18% in the late 80's to just 1.5% today — the lowest ever.
That has enabled more Aussies to 'live the dream', in boxes which will last a handful of years before crumbling like rotten feta cheese.
Baby boomers, meanwhile, have feasted on the lower interest rate trend, sprinkled with no-brainer tax planning like negative gearing and capital gains exemptions.
Some people may argue other trends like urban density, China's influence and net migration will power our house prices higher over time. That may be true.
But the fact is that many people are leveraged up to their eyeballs, with little to no international diversification (just 8% of Aussies own international shares, for example) and are staring down the barrel of far slower wages growth.
For Commbank and Co, rising house prices and lower interest rates have led to mounting household debt levels — yet lower interest repayments.
Instead of paying the mortgage down faster, many people have traded up for bigger loans.
That's music to a banker's ears.
Indeed, for CBA shareholders lower interest rates have also meant lower bad debt charges, which are ordinarily deducted straight from net profits.
Looking ahead
It's quite easy for me to paint a bleak outlook for Commbank shares. A shrewd investor might point out that I have only noted the 'big picture' macroeconomic trends.
They would be right.
Commbank is a good bank. With a market-leading share of mortgages, wealth destruction (credit) cards and much more — it isn't going away anywhere soon.
But does it deserve to be priced at a premium to the market at this time?
I don't think so.
That's why I think long-term investors should be looking for other ideas.
