1 disturbing situation that could bring Commonwealth Bank of Australia shares undone

Among other investors, it can be hard hard to be bearish on Commonwealth Bank of Australia (ASX: CBA). ‘Hey, their shares just keep going up!’ is a common refrain. My parents think Commbank is a great investment. “They earned $8 billion dollars last year, that’s an obscenely large amount of money”.

And they’re right. Apart from a brief interlude during the GFC, Commbank shares have only ever gone up, and up…and up:

Commbank share price over the past 18 years (source: Google Finance)

But I want you to consider two reasons why that is so:

  • Housing boom:

source: Reserve Bank of Australia/ Australian Bureau of Statistics

  • Ballooning levels of debt

source: Reserve Bank of Australia/ Australian Bureau of Statistics

27-odd years of unbroken prosperity have seen the Australian economy add 12,000 buildings per month, almost every month since 1992. They’ve mostly all been funded with debt.

At the same time, the amount of debt that households carry has skyrocketed. So banks have seen an incredible boom in the amount that they are lending, and the fees that they charge (e.g. on loan approvals). Parallel that with the boom in funds management and wealth products (partly due to superannuation) and the bank’s growing profits make sense.

Yet it’s not hard to imagine a situation in which these trends reverse. I wouldn’t waste my breath calling the top of the housing boom – but how much household debt is sustainable?  It’s at more than 180% of household disposable income right now. Can it go to 200%? 250%? 300%? At some point you have to sit back and say ‘these levels are disturbingly high and I am not sure I would be comfortable investing here.

Because bank shares go up forever – until they don’t.

I'd prefer to buy these 5 'strong and steady' dividend payers rather than risk my money in the banks:

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Motley Fool contributor Sean O'Neill has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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