What The Big Short movie can teach ordinary people

It's exciting watching the traders short the US mortgage market before the global financial crisis, but it's not something the rest of us can emulate.

In the film, The Big Short, you are invited to imagine yourself in the shoes of a handful of maverick traders who bet against the US housing market a decade ago.

Since we all know – spoiler alert – that the subprime mortgage boom of the mid 2000s ended with the global financial crisis, it is easy for the audience to identify with the few people who warned that the bust was coming.

Margot Robbie explaining CDOs in The Big Short.
Margot Robbie explaining CDOs in The Big Short.  

It all seems obvious in retrospect.

But as I watched, it struck me that the heroes were distinctly unlike you and me. Ordinary people don't really feature in the movie, except as willing participants in the housing bubble; the stripper from Florida with five houses and a condo, for example.

Investment bankers arguing in The Big Short.
Investment bankers arguing in The Big Short. Photo: Supplied

The reason for that is that ordinary people were in no position to do anything much about it.

The traders were shorting – or betting against – CDOs. (Collateralised debt obligations, which means a bundle of mortgages packaged into an investment security).


That's not something an ordinary investor can do directly, even if they know enough to know they want to.

Even the two traders from Colorado with a $30 million fund did not meet the capital requirements to make such a trade, until they roped a wealthy neighbour into their plans.

There are some eerie parallels between the situation in 2007 and now and not just because the banks are again trading CDOs, even if they're called something else.

By analysing the mortgage lending practices of the early 2000s, California fund manager Michael Burry correctly predicted the housing market would crash in 2007 when the higher adjustable rates kicked in and over-extended homeowners would default.

It should give pause for thought to analysts of the Australian housing market because of the rise in interest-only mortgages.

In Australia, one in four owner-occupier loans and two in three investor loans are interest-only, according to the Australian Securities and Investment Commission.

The total amount borrowed in interest-only mortgages was $88.7 billion in 2012, and $142.8 billion in 2014.

Often the interest-only period is an introductory rate for an initial five years, after which time the principal payments fall due. Banks look at what percentage of the property value is debt, so negotiating a further interest-free period is sometimes an option but only when prices are going up.

A number of people who took out home loans with an introductory interest-only period in the housing boom of 2012-2015 will have to start paying the principal in the next few years.

Fingers crossed that interest rates stay low and employment figures are stable, or things could get nasty.

If watching The Big Short leaves you feeling scared, the question is what you can do about it.

There are some managed investment options that allow you to invest in hedge funds, but you don't have much control and returns are not always stellar.

You can choose to stay in or out of the housing market, but while that makes sense for investors, I believe it's a dangerous choice when you're talking about your home.

I know people who sold their homes at the peak of the market and are renting until prices drop again. I know people who sold their homes at the beginning of the boom and are probably permanently locked out of the areas they want to live in. And I know people who have been waiting since 1998 for prices to drop. 

It's risky to presume that you can pick the top or bottom of the market with something as important as your home.

Better to buy when you're ready and spend what you can afford. And if you're already a home owner, dig deep and try to pay off the principal now while interest rates are low.

Perhaps too we should change the way we think about home ownership. The point should be to buy shelter (with tenure) for the next decade and beyond, not to make a killing.

Fear and greed are never good investment strategies, unless you make like Warren Buffett and you're fearful when others are greedy and greedy when others are fearful.

For me, the only thing in The Big Short more frightening than the spectre of the subprime crisis returning, was learning at the end of the film that Burry's current big investment is water - he's speculating on something we all need to survive.

Caitlin Fitzsimmons is the editor of Money. This is a new weekly column.