Friday, April 5, 2013

Christopher Joye's Housing Bet Dishonesty Continues

Three years ago Jeremy Grantham made some comments about the Australian property market in one of his quarterly updates. He wrote (April 2010):
The U.K. and Australian housing bubbles may be unimportant to U.S. investors, but to bubble historians they look extraordinary. The U.K. event in particular has broken out of any previous mold. Despite the usual cry of “special case”, they will decline around 40%, back to trend, as was the case for the previous 32 bubbles. If not, it will be the first time in history that a bubble has not behaved in this way. Reversion to trend will involve considerable pain, which I will discuss further next quarter if things are quiet.
Then in June (2010) he followed up with comments relating to Australia's poor affordability relative to incomes (as reported by The Australian):
He said yesterday that Australia had an unmistakable housing bubble and that prices would need to come down by 42 per cent to return to the long-term trend.

"You cannot possibly miss it," he said.

"The price of housing typically trades about 3.5 times of family income and in bubble it goes to 6 or . . . 7.5 (times).

"Australia is having one now. You are at near 7.5 times family income . . . which suggests you are twice the size that you should be."
His comments were timely as they more or less marked the nominal top for Australian house prices (national measure). 

Some five months later (November 2010) WSJ ran an article on the comments including Christopher Joye's response to Grantham's claims on the price to income ratio:
To counteract, Mr. Joye says the ratio should be about four to five times when comparing national dwelling prices with national incomes, noting that even the Reserve Bank of Australia has dismissed Mr. Grantham’s numbers.
The article didn't point out that although Joye doesn't agree with the ratio that Grantham was using, posts on Christopher Joye's own blog (RBA, ANZ) confirmed at the time that house prices had roughly doubled relative to incomes (which was Grantham's point, income ratio had doubled relative to historical norms).

Frustrated at a lack of response from Grantham, Joye proceeded to challenge Grantham to a bet on what Australian dwelling prices would do over the following three years:
This is the deal. Rismark believes it can likely facilitate a transaction whereby Mr Grantham will be able to invest $100 million into a short position over the RP Data-Rismark Australian capital cities dwelling price index, which is universally regarded as the most accurate and timely house price benchmark in the market.

Following a torrent a criticism, Mr Grantham appears to have placed tentative conditions on his extraordinary assertions, opining that, “In Australia’s case, the timing and speed of the decline is very uncertain, but the outcome is inevitable.”

Recognising Mr Grantham’s equivocality, we will give him lots of time—three years, in fact. That is, he would be able to invest his $100 million for a three year horizon against RP Data-Rismark’s Australian capital cities dwelling price index.

Mr Grantham’s investment would be structured as a very simple “delta-one” transaction: for every 1 per cent fall in the index, Mr Grantham would receive $1 million. Conversely, for every 1 per cent rise in the index, Mr Grantham would pay $1 million away. The trade would be settled at the end of three years with monthly margining to manage credit risk.
Note the price index that Joye suggests they use to measure the outcome is the "RP Data-Rismark’s Australian capital cities dwelling price index", which is an index measuring price movement only.

I pointed out on my blog early last year (February 2012) that Joye had already tried to manipulate the results to date when he wrote a follow up article:
How would Grantham have fared had he backed his own rhetoric? The indices that RP Data and Rismark produce for trading purposes are “total return” benchmarks, much like the ASX All Ordinaries Accumulation index, which tracks changes in capital values and dividends.

Since the end of October 2010, when we first outlined this idea, RP Data-Rismark’s capital city accumulation index has risen by about 0.2%.

So using this benchmark, which is the most likely index that a counterparty would wish to trade against (given they’d be expecting the capital gains and rental income realized from Aussie housing), Grantham would be down around $200,000. Call it evens.

If, on the other hand, he wanted to use the RP Data-Rismark index that follows changes in capital values, Grantham would be up about 5% assuming we could have found a counterparty willing to ignore incomes (or rents).
Although no official response was received from Grantham on the original bet, Joye starts to twist the outcomes of the bet (which exists only in Joye's mind) by making the suggestion the accumulation index should be used instead of the dwelling price index.

Now I find that in an article on Friday Joye continues to promote measurement of the results using an index other than the one suggested in the original challenge:
How would he have fared had he stepped up to the plate? My second chart shows the performance of RP Data-Rismark’s total return and capital-only indices since December 2012. The total return captures capital growth and rents. The capital-only index ignores income.

On the basis of the total return index, Grantham would have lost $8.2 million to date. Total losses might have been quite painful as the trade would not have settled until December 2013.

The capital-only index implies a small mark-to-market profit of $1.4 million, although this is evaporating every day. And it is miles away from the $40 million gain Grantham anticipated. It will be interesting to see where things stand come December.
Click Chart To Enlarge
I particularly like the way Joye introduces a strawman argument in the last couple of sentences suggesting that the profit of $1.4 million currently attributed to Grantham in the imaginary bet would be far from the $40m anticipated. He implies that Grantham had suggested a 2-3 year time frame on the 40% reversion to trend, which was not the case.

It's probable that Grantham will be wrong on the 40% correction, but there's still a good chance he will end up on the profitable end of the challenge if held to the original conditions. I think it's dishonest to take an unaccepted challenge, speak as if it was real and then highlight results in an index which wasn't used from the start.

There's eight months to go. How much more spin will Christopher Joye be able to add to this story before the time is up? I would think twice before sitting down to a game of cards with this man.

Punk blogger signing out.

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  1. Both these contributors ignore criminal and unethical realities in the policy setting of government, banking and demand for housing. people who follow my blogs on, The Age newspaper, and Confounded Interest will know that I have no faith in Government, Policy setting, regulatory bodies or human nature, and all demand for housing and supply of housing does not follow traditional theoretical economic models.

    Australia's housing market is a mixture of tax planning (negative gearing) tax evasion (ploughing profits and illegal kickbacks into principal place of residence i.e. No tax paid on capital appreciation, effectively a money laudering exercise) foreign investment to gain Australian citizenship, or house family while corrupt bureacrats steal from their nations (have to keep the family safe if you need to run quickly) Australia's house prices are always reported as an average. Not a median value, so the extremes of house prices and incomes cloud the true nature of price rises. report median prices and median incomes to get an idea of house prices, then compare averages, to get an idea of the hot money causing bubbles.

    In my opinion, the median guy on median wages has rocks for brains if they get married and buy a home. Women will have a fat chance of marriage and children. This is a travesty for social planning, and the government has been captured by vested interests. Most median house price costs is the land and this should be released to make it cheaper to bring up a normal traditional family.

    They should be jailed for what they are doing to Australian society.

    Buddy Rojek, CPA
    Convener, Australian Nationalist Party

    1. I agree vested interests have been able to dominate Government policy and mainstream media on housing issues.

  2. And for any politicians reading this blog, once we get enough seats in Parliament we will pass a retrospective law to enable the forfeiture of assets and jailing of Politicians, who contributed to bad laws. Your voting patterns will be noted. And if you run overseas, we will extradite you.

    Buddy Rojek, CPA
    Convener The Australian Nationalist Party

  3. It's been three years since Grantham made those absurd (and uninformed) comments re Aussie housing. And Five years since the collapse of Bear Stearns and the start of the GFC. Aussie house price have not crashed, and Sydney is at new highs.

    Bottom line on Aussie house prices- Grantham is wrong.
    Keen is wrong
    Minack is wrong
    Soos is wrong

    The only thing I can find which has fallen by more than 20% in real terms lately has been Gold.

    1. As I said in the post, it's probable that Grantham will be wrong (in my opinion). I don't see what relevance the other names you listed have to the post or my blog.

      The point of the post was that despite the outcome of the bet or whether Grantham is right or wrong on how overpriced Australian property is, Christopher Joye has been dishonest in the way he presents the results, wouldn't you agree?

    2. No I wouldn't.

      The fact Grantham did not take up the bet is irrelevant. He has no problem making his "big calls" and get as much free publicity for his business as he can - who care whether is scares the cr@p out of ordinary Australians? I find it refreshing people like this are held to account (they rarely are).

      Further, anyone who calls assets over priced take into account income and capital. So it is totally reasonable for CJ to use total returns (ie: including rent). In the real world, people who short stocks and bonds forgo the underlying income - why not use the same measure for houses.

      After all - according to Grantham, Australia is one of the greatest asset bubbles of all time - he should be happy to include income in his views.

    3. CJ throwing out $100m bet headlines to try and get a $100b fund managers attention and then consistently bringing up details of the bet and belittling Grantham's results (even though he didn't even acknowledge the challenge) by twisting the details of the index used to measure is not an attempt for free publicity?

      CJ toots his own horn and pumps his own business interests every chance he gets in Australian media. How about holding him to account for his actions? He wants to turn the Australian real estate market into a punting ground with a tradeable daily house price index while no doubt his company would be scalping a fortune in fees as market maker. He's involved in a funds management group offering home loans and is about as leveraged to higher real estate prices as you can get (from a career and business perspective). Nothing I've seen from the man would suggest he gives a crap about "ordinary Australians" who have to put up with extraordinary house prices.

  4. Who cares - it's all a big troll-up anyway, Joye is having a laugh, and rightly so... he's been pretty much right while the bears have been wrong, so why not have a bit of fun and take the mickey out of the bears. You need to lighten up BB and treat the whole bull vs bear war as a big troll-up, like the rest of us do.

  5. Great analysis BB. I just read CJs article in the weekend AFR - quote "One thing we know about house prices is that past performance is a guide to future returns" haha

    1. Not sure how I missed that little nugget, hilarious!

  6. Pretty much the last thing I would do with my capital right now is to buy a house and it almost doesn't matter where,since most of the developed world is currently in bubble territory and that includes Australia.Actually,my research and in some cases direct experience tell me that Oz,the U.K.,France,Canada,Hong Kong and China with its huge ghost cities are all contending for the title of most overvalued RE market.Other notable participants in the contest are Switzerland(where total or partial interest only mortgages are common,as both banks and buyers understand that principal can't and won't be repaid and so they rely on capital appreciation),Belgium,the Netherlands and northern Europe(where in some cases the long trip down has already commenced),Singapore(where the only mitigating circumstance is that a remarkable level of economic freedom helps in creating real prosperity)and,surprisingly,even the US,where the FED's policies have been instrumental in re-igniting the RE fire(bubble activities are mostly confined to the opposite extremes of the production structure,i.e. consumption and early stages and the latter includes housing).I did not take the time to research the matter,but a keen developer told me a while ago that Thailand is also pretty bubbly and it wouldn't surprise me to learn that other developing markets have got ahead of themselves,thanks to the sea of money inundating them like a Tsunami.As an example,South Africa is also working on its RE addiction problem and I had the chance to be there right at height of their massive property bubble and enjoyed seeing all the usual signs of speculative madness(BTW,their bubble really was a MAJOR one,given also the fact that most of the populace gets by with very little mo').Finally,I was in Dubai a couple of weeks ago and it was a pleasure to see that they haven't really learned anything:cranes everywhere,which most likely means morons everywhere as well.It'll pop just like the last one did(actually I expect it will be worse).
    On the bright side,I will likely visit Cyprus next fall,as I suspect that in 12/24 months' time buying a house there would be a very safe speculation,as the country has been brought on its knees and its major industry killed:I'd love to snap up a beach-side villa with a poll for a fraction of the price of a tiny flat in central London.
    All in all,I'll likely choose to dedicate my next major post to worldwide RE bubbles,as they're a major theme these days and their bursting will make quite a bit of noise.
    Moreover,shorting bank stocks like CBA in OZ,BNS,RY and CIBC in Canada,BNP in France etc. could turn out to be a very profitable trade,which I've been very keen to build in the last few months by purchasing long-term put oprions.

    1. Good post and agree to a large extent. Collapse of Australia's property bubble was propped up in 2008 by massive Government stimulus to bring forward demand as interest rates were dropped, this combination followed by the high commodity prices and mining boom has avoided a large collapse in prices so far.

      I don't think we will ever get the collapse in nominal terms that some bears have suggested (30-40%+), but could be proven wrong. Best case scenario IMO is a decade of stagnant prices as incomes catch up, but we'd be lucky to have it that easy.

    2. Yep,I do not know how much prices will decline,but I suspect it'll be severe:I have yet to see a successful soft landing...
      In any case,playing it via the banks eliminates the problem in my opinion,since they're so exposed to the RE sector that even a mild 10-15% decline(which is very likely baked in the cake in most of the markets mentioned above)would put them in serious trouble.The fact that some of them,like CBA,have just printed their all-time highs is a juicy bonus as well.

  7. I publicly challenge C Joye to a $100 million dollar bet. All he has to do is pick a number, I will also pick a number, then I will reveal what the correct number is.

    Whoever is closer will win the $100 million.

    If he refuses to accept I will reappear in 3 years and lie about the challenge. Hopefully there will be some loser on the internets (lets call him "the banker 39" for arguments sake) who will then stick up for me.

  8. This is as funny as f*°k!

    Joye might consider seeing a psychiatrist about his delusions that Grantham is somehow involved, or was involved in this bet.

    Statements like this are concerning " And it is miles away from the $40 million gain Grantham anticipated."


    Also of concern is Joyes propensity to project his own behaviour into the imaginary adversary 'Grantham'.

    Thus " Recognising Mr Grantham’s equivocality, we will give him lots of time—three years, in fact. ...." despite Joyes own extremely equivocal statement in relation to the bet: " This is the deal. Rismark believes it can likely facilitate a transaction whereby Mr Grantham will be able to invest $100 million into a short position over the RP Data-Rismark Australian capital cities dwelling price index"

    Grantham would be mad to even accept the bet given Joye wasnt even sure he could facilitate the bet lol.

    Clearly Joye has no understanding that someone as successful as Grantham doesnt bother playing games with someone who isn't sure he can raise the funds to back his bet.


    1. "Rismark believes it can likely facilitate...".

      Who would take up a challenge framed like that. What a hoot!

      Whats this joker going to say next?