Sunday, November 7, 2010

Australian Housing: Get Real Christopher Joye

I couldn't help but laugh at a recent post over on Christopher Joye's personal blog "Aussie Macro Moments". It's an article from the Wall Street Journal detailing a bet that Joye has challenged Jeremy Grantham to. I would like to break down the article to discuss a few points. Here is a link to the original article.
Australian Analyst Challenges US Guru To A$100M Property Bet
WELLINGTON (Dow Jones)--Australia's most vocal proponent of the country's property market Friday challenged Wall Street investment guru Jeremy Grantham to wager A$100 million on the outlook for the country's housing prices.
First let us just remember who we are talking about here. This is not an Australian analyst on analyst bet (like Keen vs Robertson). Jeremy Grantham is a co-founder of (and Chairman of the Board for) GMO (Grantham Mayo Van Otterloo) who have assets under management of $107B, Christopher Joye is founder (and Managing Director) of Rismark International, a global funds management and advisory board. Trying to find information about the value of Rismark or the value of the funds they control is difficult, but suffice to say it would pale in comparison to the size of GMO. Joye is not in the same league as Grantham. 

I suspect Grantham won't respond, but that's not really surprising, it would be like myself (a random blogger) challenging Christoper Joye to a $100m bet, I'm sure he wouldn't respond either.
Christopher Joye, managing director of property research group Rismark International, challenged his equally vocal sparring partner GMO Capital founder and chief investment strategist Grantham to put his "money where your mouth is" on the issue of whether Australia really is in a property bubble.

Grantham's downbeat views on Australia's home prices are "sensationalist and spurious," Joye said.
The term "sparring partner" makes it sound as if these two have gone head to head. Sure they have opposing views, but as far as I'm aware Grantham has not responded directly to any of Joye's comments in the past.
Joye challenged Grantham to bet the A$100 million over a three-year term, basing the outcome of the bet on movements in the RP Data-Rismark Australian Capital Cities Dwelling Price Index.

For every 1% rise in the index, Grantham would receive A$1 million, Joye said. But for every 1% decline in the index, Grantham would pay A$1 million away.

The trade would be settled at the end of three years with monthly margining to manage credit risk.
First let's look at the number Joye uses....$100m. The index would have to rise or fall 100% for a payout of that size to take place, is that what Joye expects to happen one way or the other? Let's be serious, the payout, if the bet did go ahead would be nowhere near the size that is suggested by the headline grabbing number used.

Secondly look at the index Joye wants to use, the RP Data-Rismark Index. You may recall I mentioned above that Joye was the Managing director of Rismark International? Talk about a conflict of interest. Joye wants Grantham to take a bet, the outcome of which is directly reliant on an index which doesn't allow public examination of their methodologies and further to this one that Joye's company is directly involved with? Surely he jests!
The high stakes wager comes on fresh warnings from Grantham in his latest quarterly investment letter that house prices in Australia are set to fall as affordability is stretched and consumers are already spending too much on homes. Australian house prices have grown strongly over the last 20 years. In major capital cities such as Sydney and Melbourne, the average median home price has doubled in value in eight years and quadrupled in 21 years.

The bet is the latest installment in a long-running war of words between Joye in Sydney and Grantham--though Grantham is yet to directly go after his rival down under.
They are not words "between" Joye and Grantham. To date they have only been words from Joye at Grantham. Talking at someone does not constitute a "war".
"We would ask Mr. Grantham to cease and desist from his hyperbolic jawboning," Joye told Dow Jones Newswires.

"If you actually have any conviction regarding your predictions about the 'time-bomb' that is Australia's A$3.5 trillion housing market, we would ask that you put your money where you mouth is," Joye said.

Grantham has repeatedly argued house prices in Australia are overvalued warning a speculative bubble was set to burst. At one time, he estimated housing in Australia was overvalued by 42%.

Joye has rejected these assertions saying it has whipped up hysteria among hedge funds which have become needlessly wary about investment in Australia.
They've got good reason to be wary about investment in Australia, especially in areas directly relating to or affected by house prices. Property may not drop by the 42% that Grantham suggests it's overvalued, but there are certainly some risks to consider including our banks heavy reliance on offshore funding.

I will post Grantham's latest comments on Australian housing at the end of this blog and you can judge for yourself whether it is "hyperbolic jawboning".
The Reserve Bank of Australia has also waded into the debate saying the bulk of mortgage-related debt is held by those most able to service it. RBA Deputy Governor Ric Battellino said earlier this year the ratio of house prices to income "is not that different from most other countries."

Joye has been supported by analysts at Goldman Sachs, Westpac, Commonwealth Bank of Australia, Australia and New Zealand Banking Group and HSBC. Strong population growth and claims there is a chronic shortage of housing in Australia are often cited as reasons to expect strong demand will underpin house price into the future.
CBA, Westpac, ANZ and HSBC all have strong interests in seeing the Australian property market increase (given their lending is to borrowers buying these assets), so in my opinion their views aren't independent enough to take seriously. Goldman Sachs recently claimed that Australian housing is not in a bubble, but did estimate that Australian housing prices are currently between 25-35 per cent overvalued...I would be interested to hear what Goldman's definition of a bubble is, because they estimate our property is almost as overvalued as Grantham suggested (35% Goldman vs 42% Grantham).

Australia's mythical "housing shortage" is a topic I will cover in more depth at a later stage, but suffice to say I disagree that we have one.
But some foreign banks, including Morgan Stanley and the International Monetary Fund, have called the property market overvalued.

Warring over the issue of house prices in Australia has resulted in some strange goings on. Academic Steven Keen walked from the nation's capital Canberra to its tallest peak at the start of the year having lost a bet with economist Rory Robertson that house prices would drop by up to 40%.
Once again the Keen vs Robertson bet is misrepresented.

The bet lost was not that prices would fall 40%. The bet lost was based on the direction of the ABS Housing Index over the 12 months following the face off. The longer term bet is still in play and Robertson may still walk (although my personal opinion is that we won't see houses fall by as extreme a percentage as Keen has suggested).

As promised earlier here is Grantham's latest comments on Australian housing:
GMO quarterly 26/10/10 – page 15-16

Postscript: Australian and U.K. Housing

I happily concede that the U.K. and Australian housing events are not your usual bubbles. Australia, though, does pass one bubble test spectacularly: we have always found that pointing out a bubble – particularly a housing bubble – is very upsetting. After all, almost everyone has a house and, not surprisingly, likes the idea that its recent doubling in value accurately reflects its doubling in service provided, e.g., it keeps the rain out better than it used to, etc. Just kidding. So, the house is the same. Perhaps the quality of the land has changed? In any case, Australians violently object to the idea that their houses, which have doubled in value in 8 years and quadrupled in 21, are in a bubble.

The U.K. and Australia are different partly because neither had a big increase in house construction. That is to say that the normal capitalist response of supply to higher prices failed. Such failure usually represents some form of government intervention. In Australia, for example, the national government sets the immigration policy, which has encouraged boatloads of immigration, while the local governments refuse to encourage offsetting home construction. There has also been an unprecedentedly long period of economic boom in Australia, and the terms of trade have moved in its favor. And, let’s not forget the $22,000 subsidy for new buyers. But does anyone think that bubbles occur without a cause? They always need two catalysts: a near-perfect economic situation and accommodating monetary conditions. The problem is that we live in a mean-reverting world where all of these things eventually change. The key question to ask is: Can a new cohort of young buyers afford to buy starter houses in your city at normal mortgage rates and normal down payment conditions? If not, the game is over and we are just waiting for the ref to blow the whistle. In Australia’s case, the timing and speed of the decline is very uncertain, but the outcome is inevitable. For example, the average buyer in Sydney has to pay at least 7.5 times income for the average house, and estimates range as high as 9 times.

With current mortgage rates at 7.5%, this means that the average buyer would have to chew up 56% of total income (7.5 x 7.5), and the new buyer even more. Good luck to them! In the U.K., which also has floating rate mortgages and, in this case, artificially low ones, the crunch for new buyers will come when mortgage rates rise to normal. But even now, with desperately low rates, the percentage of new buyers is down. Several of these factors, which do not apply to equities, make for aberrant bubbles, and clearly the Australian and U.K. housing markets fit the bill. In comparison, the U.S. and Irish housing bubbles behaved themselves. So let’s see what happens and not get too excited. After all, these may be the first of 34 bubbles not to break back to long-term trend. There may be paradigm shifts. Oil looks like one, but oil is a depleting resource. If we could just start depleting Australian land, all might work out well.
Hyperbolic jawboning? Which part Christopher Joye?

Not only do we have our major banks refuting that there is a housing bubble (see my recent blog post here which mentions their reports), but we've also got a "respected" Australian analyst attempting to make a ridiculous bet. A lot of work is going into refuting Australia's "mythical" housing bubble...why go to the effort if there is nothing to worry about?



  1. This is typical of the self-importance displayed by so many prominent Australians. They seriously think that the rest of the world is interested in us, when they simply aren't, except as a supplier of resources.

    Of course, Grantham hasn't responded. I bet he had a good chuckle over breakfast, then went and made a few million for his fund before lunch.

    I find it amusing that the mainstream media and Joye assume that there's some kind of emotional investment that Grantham has, what with all the talk of 'sparring' and 'war'. Really, all that happened was he visited a small country, saw an obvious bubble there, and commented on it. A heap of self-interested goons in that country then started slagging him off.

    I'm sure Grantham's care factor is zero over the whole thing. If anything, the frothing irrational response simply backs up Grantham's position.

  2. one might think that christopher joye's rismark is also sourcing money oversees.

    could it be that grantham has, with his report, pissed on rismarks chances of getting cheap money abroad as well?

    don't forget that joye is a vested interest spruiker...not just a 'usefull idiot' !

  3. why should grantham care what some minnow thinks of his prediction ?
    there is nothing to be gained in acknowledgment of this challenge !

  4. Thanks for the replies all.

    Alex I agree with your comment that it should be based on the ABS Index if it were to go ahead.

    At the moment the bet just reeks of a publicity stunt to get the Rismark/RPData Index back into the lights (as you say Joye is good at self promotion).

    Personally I hope Grantham doesn't dignify Joye's pathetic challenge with a response.