Schwab: Joye brings himself no joy with coloured views
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Self-appointed property expert and Rismark boss “Conflicted Chris” Joye, recommended yesterday that I “stick to my day job” and stop writing about housing. It appears that Joye and his friends in the real estate industry don’t take too kindly when anyone (such as Steve Keen, Stephen Walters or myself) dares suggest that housing is over-priced — apparently it isn’t good for business. Chris forgot to mention that his own “day job” depends on the housing market continuing to boom. That is because Joye is the managing director of Rismark, a company that effectively profits from (indirectly) selling property to investors. As noted in Crikey earlier this year, Rismark offers “an innovative product called an Equity Finance Mortgage. EFM’s allow home buyers to effectively sell some of the equity in their home to investors (and can use those funds to upgrade the premises or retire debt). The only problem with EFMs is that in a falling market, it would be extremely difficult to find people who would want to directly invest in the residential property market. It is hard to envisage Rismark enjoying growth in revenue from its EFM product should the residential property market encounter a prolonged period of negative growth as is being felt in the US, UK, Ireland, Spain [and] Germany.” Because of Joye’s vested interest in continued property appreciation, his views are somewhat coloured — much like those of real estate agents or mortgage brokers (a Crikey reader questioned yesterday whether Joye was “the Jim Cramer of the housing tulip mania”). Joye tends to choose statistics that suit his view and conveniently ignore any facts or arguments to the contrary. To put it another way, would you ask a salesman at the local BMW dealership whether now is a good time to buy a car? Joye did get one thing right yesterday — the median price of Australian property is closer to his suggested $380,000 than $480,000 as your correspondent wrote on Wednesday. The difference is that my article focused on city property and therefore, the word city was inadvertently (and erroneously) omitted. However, that did not alter the thrust of the article — that urban residential property is in the midst of a substantial bubble, and that the main reason relied on by property bulls (such as population growth through migration causing a shortage of dwellings) is fallacious. Joye then launched into a statistical tirade. The only problem is, rather than undertaking his own research, Joye appeared to outsource his work to the Reserve Bank. Joye stated:
In reality, there is no “best definition” of ‘household disposable income’ — rather, the use of such benchmark is most appropriate if those same are used in other jurisdictions to allow for a meaningful comparison. Joye didn’t even bother to compare his chosen definition of household disposable income with that of the US or UK or any other country — either because no one else uses the same definition, or more likely, because it wouldn’t support his argument. Further, Joye claimed “Australia’s dwelling price-to-income ratio today is slightly above 4x” — which means that household disposable income is apparently $90,000. This figure is somewhat surprising given the ABS told Crikey yesterday that ‘mean’ household disposable income is $71,000 (the ABS only calculate an equalised median, which is about 15% less than the equalised mean). Therefore, based on data actually provided by the ABS (rather than regurgitated from the Reserve Bank website), Australia’s dwelling price-to-income ratio today is above 5.2, but more than 6x if the median household income is used. Using a less controversial “Price-to-Income” measure (thereby avoiding what actually constitutes “household disposable income”, which sometimes includes interest payments and sometimes doesn’t). Australian property appears more expensive than our counterparts in the US and UK. The US in particular has a similar level of income (about $50,000) but has a median property price of approximately $US180,000. Joye claimed that Australia’s median price is $370,000 — making our residential property about double as expensive as the United States compared with actual income. Not only do statistics fail to support Joye’s claims, but his arguments vindicating Australia’s property prices simply make no sense. Joye claimed that the reasons residential property is not expensive are:
The first point is completely irrelevant as to whether housing is over-priced — the intrinsic value of an asset in not related to the ubiquity of ownership but the present value of future cash flows. (For instance, share ownership has significantly expanded in the past 20 years, but that didn’t prevent the share-market bubble popping in 2007). Even worse, Joye’s second point reason is actually a symptom of an over-priced market rather than a reason that it is fairly priced. Low mortgage default rates are indicia of an economy running close to full capacity. Like someone running at full speed, they can only slow down. If unemployment increases or interest rates rise, mortgage defaults will increase and property prices inevitably fall. Unless Joye is suggesting Australian unemployment will never again rise above 6% this is not a valid reason either. Joye’s third point is almost embarrassing for someone once dubbed one of Australia’s “smartest CEOs”. For example, property prices rose in the United States after the Federal Reserve reduced rates in the wake of the dot.com crash. According to Joye therefore, the rising market in the US would have been a reason that property prices were not expensive. This argument simply makes no sense. Rising prices (especially prices that are rising at a far greater rate than economic growth, inflation and rentals) are a sign of a bubble. This was the case in the US, when property slumped by more than 30% (and up to 50% in some regions) in 2008, having almost doubled in the preceding decade. Similarly, between 1981 and 1991, Japanese property prices rose by 250%, which, according to Joye would have been a sign that property was fairly priced. Sadly for the Japanese (and Joye’s reasoning), property prices fell back to their 1981 levels by 2003. Property may be fairly priced and “Conflicted Chris” Joye may well be right — it’s a shame though that he isn’t able to articulate a single coherent argument to support his theory. |
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16 Comments
Notwithstanding the personalised diatribe, I take it from the verbiage above that you acknowledge that your statement that Australian house prices are 9x disposable incomes is way wrong given that you are now telling us (rather obtusely) that you think they are more like 6x, and this, you acknowledge, is only in capital cities.
Adam, I have no interest in continuing this debate. When the RBA tells us that capital city house price to income ratios are 4.8x, I will take their numbers over yours any day.
And when we take the national median dwelling price of $370k and use the RBA’s definition of disposable income, the national median dwelling price to income ratio is 4x, less than half the 9x number you used as the basis for your previous article.
Unfortunately, pointing to purported conflicts does not make your wrong numbers any more right.
There was something else dodgy about Adam Schwab’s housing figures on Wednesday.
He calculates the annual rate of dwelling approvals by multiplying a
single month’s (seasonally adjusted) figure by twelve. This would be
appropriate if October were an average month. But it was not. It was
the second highest such figure in the year to October, beaten only by
September.
It is fairly easy to simply add up the monthly figures from the
previous year, and I’m not sure why he didn’t do this. Rather than his
‘more than 150,000’ you reach a year-to-October total of 135,407
dwelling approvals. (135,038 if you add up the seasonally adjusted
figures, but it is a full year.)
Unfortunately for his argument, that is fewer than the number of
necessary dwellings according to his formula. He uses an average of
2.6 people per house, and reports last year’s net immigration of
213,461 and net natural population growth of 152,700, for a total
population growth of 366,161. Divide that by 2.6 and you get 140,831 -
which is more than 135,407.
Now, even corrected in this way, it’s a pretty simplistic way to look
at pressures on the housing market, since there are many other factors
at work, and we are comparing last year’s immigration with this year’s
approvals for next year’s houses.
The argument that newborn babies are not in a position to buy houses
is pretty silly, since the progress of time affects all generations
simultaneously and while babies are being born, others are entering
the housing market for the first time and parents are seeking larger
houses in which to raise their newborn children. He is also mistaken
to portray pressure on the housing market as coming only through house
purchases, since pressure on rents changes the yield for investors and
impacts the market in a different way.
Personally I’m agnostic about what is going to happen to home prices.
But maybe a little less snark from the price-crash crowd, a little
less treatment of opponents and readers as idiots and/or scoundrels,
would be a good thing.
The obsessive comparison with the UK and the US is misplaced. Anyone that has lived in the UK is gobsmacked by the outrageous prices — and not just in London. Having purchased two flats (could never afford a house in the two towns I lived in) the only reason I survived was the usual one: luck of the market in timing. I have friends there who, like most Brits, want to migrate maybe to Oz, but are now stuck until the next upturn.
The USA is a vast and highly diversified housing situation. But Schwab’s comparison with cities in the US is the only sensible one, because Australia is mostly urban. (Joye’s statement that 40% of Australia’s housing is not in the cities is a nonsense of definitions: far flung parts of our cities are not always counted. But saying places like Logan in Brisbane (between Brisbane and Gold Coast) is not in the city is meaningless.)
As usual the statistics can only reveal limited facts. Especially the comparative stuff on countries given that the forex rate has changed almost 40% in a short space of time (who believes that PPP is a real adjustment?). But on balance Schwab is more on the money as any travelled person knows. Our property obsession is inherited from the Brits and is just as toxic if only relieved by relative prosperity (unearned, being entirely due to Asian growth) and continued high growth/immigration. But it cannot last. Just how long though is the usual lottery (which Keen just lost). Tying up one trillion dollars in unproductive housing is no way to use our capital.
“the intrinsic value of an asset in not related to the ubiquity of ownership but the present value of future cash flows. “
If you’re living in the asset, there is no cashflow you dork - it’s a home. It will never provide you with a cashflow to live on, unless it is an investment property, and even then, it won’t be great. Never has been, it’s entirely taxable.
Excellent points Michael and Michael, well made.
ABarker, houses people live in themselves still have an ‘intrinsic value’ - simply because the owner is not paying rent that doesn’t mean an implied rent cannot be calculated.
From the RBA, on the 4.8 price/income rate: “The dwelling price to income ratio is constructed using median dwelling price data from the REIA and average household disposable income data from the ABS national accounts. “
I do not understand why you would compare median house price with average income; the median income is much more meaningful.
Looking at a 2007 housing affordability report (see graph 7), Australia clearly has a higher price/income ratio (again using median price vs average income - without knowing how other countries measure this ratio). Since this time, we know that prices have dropped in most countries. Ireland has the second highest rate and prices there have crashed.
Whether the rate is 4.8 or around 6 (as many sources indicate) it is very high both by international standards and by historic standards. We can’t take advice from real estate agents as to whether prices will rise indefinitely, for the same reason that we don’t ask oil companies about the environmental impact of oil.
A crash is unlikely, but there will undoubtedly be an extended period of price stagnation (decreasing in real terms) eventually. It’s hard to imagine that prices will continue to increase in the meantime but in my experience property investors are either irrational or are relying on the irrationality of other investors.
It doesn’t make sense for people to pay what they are pay more for tulips than they are worth, so the current valuations must be good! Mark my words, tulip prices are only going to go up as supply continually fails to meet demand and anyone who says otherwise doesn’t understand the extenuating realities of the tulip market!
Orin, I’m not sure if you’re being sarcastic here or rewriting the Efficient Market Hypothesis.
It doesn’t make sense for people to pay what they are pay more [sic] for (insert here dot-com shares, US residential property, subprime mortgage bonds, …) so the current valuations must be good! Mark my words …
Interesting slant on migration figures Adam…you made very good points.
((((Rismark offers “an innovative product called an Equity Finance Mortgage. ))))
My Father always told me that back in his day Home Equity loans or Equity Finance Mortgage as it is known today, were called 2nd mortgages…or even 3rd and 4th mortages.
Anyone who had one back then was considered a loser!!!…they were frowned apon as someone who had hit the bottom. How things change over time…today if you DON”T have one you are considered a loser.
Truth is, they are ticking-time-bombs…and as you state it only takes a very slight shift in economical conditions to turn a trickle into an avalanche of defaults.
Adam Schwab, it worries me that Christopher Joye always seems to have you and Steve Keene on the defensive, justifying your analyses.
Mr Joye’s analyses are highly sophisticated, his Rismark index service is peerless, his qualifications are extremely impressive, his writing is of the highest standard, he devotes an extraordinary amount of time to it, he makes strongly argued submissions to government inquiries on a wide range of subjects from prudential regulation and superannuation to the state of home affordability. As this profile shows, he’s one of the most brilliant intellects in Australian financial commentary.
Mr Joye has enough brains and knowledge to save the country from its intellectual decline, but that’s not what he chooses to do with it. Every single word he pens is devoted to the relentless single minded goal of pushing home prices upwards as far as they can go.
For example:
- Highlighting the critical role played bysecuritization in the US housing market as the reason American home prices crashed and Australian ones didn’t. He describes securitization as the “far-reaching flaw sitting in the foundations of the US credit creation system.” But that doesn’t stop him recommending that Australia imitate it — see below.
- Claiming that the housing affordability crisis (the same one he offers to solve, see above) is a myth, and that “investment in both new and existing housing provides us with one of the most profoundly basic human needs: shelter.” (I love this argument, from which it also follows that people who buy hundreds of concert tickets in the first minute they go on sale, then resell them close to the concert date, are “providing” entertainment.)
- Proposing to solve the (nonexistent) housing affordability crisis by giving the federal government power to set development quotas for local councils, which he claims would ease development bottlenecks (assuming federal government uses those quotas to ease bottlenecks rather than to tighten them, against all historical evidence to the contrary).
- Convincing the federal government to create an Australian Freddie Mac and to invest $16 billion of taxpayer money in Residential Mortgage Backed Securities (RMBS), to “insulate Australian households, and the key financial institutions that provide them with funding, from external capital market shocks that have nothing to do with the integrity of the Australian economy, its financial system, or the quality of Australian home loans”. This in spite of his earlier claim (see above) that securitization was the key difference between the failed US market and the buoyant Australian one.
- Arguing that super funds have got their portfolio weightings wrong and should invest less in equities and LPTs and more in RMBS and CMBS, again despite his earlier argument that this was the downfall of the US housing market.
- Proposing that a government-owned “Kanga-Super” superannuation fund should be implemented to pursue parallel objectives of investing workers’ retirement money, and propping up beleaguered asset classes in a crisis. “Many risk-averse employees would doubtless find this attractive. Importantly, the government could then invest these savings into cash-starved areas of the economy such as highly-rated bank debt, corporate debt, and mortgage-backed securities, which have been inadvertent casualties of the global financial crisis.”
- Offering shared-equity home investment through Rismark International, which helps people buy more with less, a powerful workaround for the (nonexistent) housing affordability crisis.
There is a common theme here. Mr Joye wants prices to go as high as possible, and he is extremely effective at enlisting government to make this happen, any way it can, for the public good. Anyone who comes up against that highly gifted, razor-sharp, superbly educated mind is lampooned and discredited.
Critics of Mr Joye have seriously underestimated him. His effect on government interference in the real estate sector is a grave danger to the liberal economy, and, if his own fortunes benefit from high rising home prices, an extremely reckless way of achieving financial success.
Mr Schwab, Mr Keene, your usual commentary is not having much effect on government policy, and that’s why your forecasts have not come true. (Why do economists so often miss the element of policy response and human volition, which is absent in physical-system analogues for economic modelling.) A more aggressive lobbying campaign is required to counterbalance this energetic, relentless, single minded influence on the trend of government thinking.
I stuffed up two links:
- Claiming that the housing affordability crisis (the same one he offers to solve, see above) is a myth, and that “investment in both new and existing housing provides us with one of the most profoundly basic human needs: shelter.” (I love this argument, from which it also follows that people who buy hundreds of concert tickets in the first minute they go on sale, then resell them close to the concert date, are “providing” entertainment.)
- Proposing to solve the (nonexistent) housing affordability crisis by giving the federal government power to set development quotas for local councils, which he claims would ease development bottlenecks (assuming federal government uses those quotas to ease bottlenecks rather than to tighten them, against all historical evidence to the contrary).
You all must have a lot of time on your hands…i do not read any comments about equity - the average mortgage holder in australia owns around two-thirds of the principle place of residence (ABS), even first home buyers (obviously not those that used the boost) have around 25%. also why do we use household incomes (however calculated - which by the way should only be sourced from the ATO, as 1/8 of us - usually the better off - do not fill in the income questions from the census - also it is harder to lie to the ATO) against a house price, surely a better measure would be income versus the size of the mortgage/loan size, which when you compare the two is just over 2.
Any comments? Or given that I have replied on Monday, a full three days after posting, that this is old news?
PS Residential prices, for mine, will not show much growth in the next couple of years (CPI at best) as new supply (whilst not as tight as the “industry” makes out, is still very constrained. prices are liekly to fall a bit during 2010, and especially during the first half of the year as the boost stops, investors find they cannot afford to buy (they need a deposit these days) and sellers face reality. the last 6 months has been inflated by govt largesse and emergency interest rates.
house prices are too high in australia, but unless we see a masive change in politics - pork barrelling marginal seats (i.e. the FHOG), green policies, urban footprints and now real nation building infrastructure nor polices (i.e. an inland railway connectioning brisbane, sydney and melbourne and decentralisation of the workforce) - then we are all going to want to live in and around our capitals, demand will exceed supply and usually prices go up.
(((((There is a common theme here. Mr Joye wants prices to go as high as possible, and he is extremely effective at enlisting government to make this happen, any way it can, for the public good. Anyone who comes up against that highly gifted, razor-sharp, superbly educated mind is lampooned and discredited)))))))
As the market begins to get tighter due to the absence of stimulus and rising interest rates and other factors, we are seeing the ramping-up of prices within the industry.
Vendors are only too happy to comply with the agents for the obvious reasons of capital gain and the resoloution of debt…but it’s artificial and just plain wrong.
I have seen several properties in the same area remain unsold for nearly 2 years at the same asking price, and then all of a sudden they reappear with an asking price of 100k - 200k more than the original price.
Market forces???….i doubt it. If this is collusion then it should be investigated, but by who?
Michael Matusik - “the average mortgage holder in australia owns around two-thirds of the principle place of residence (ABS), even first home buyers (obviously not those that used the boost) have around 25%”
It’s that rapid leap in equity from 1/4 to 2/3 that drives government policies on home prices. The gain in equity is achieved mainly by market prices rising after the purchase; this factor dwarfs the other two factors which are inflation and loan principle repayment.
That’s why government likes Mr Joye’s recommendations so much. Home owners are voters. Only a very small number of prospective home buyers are voters; the rest are children or not yet born.
But the effect of policy-driven hyperinflation in the housing market is to draw down future productivity from those workers of the future and spend it in lifestyle consumption today - free stimulus which appears to fall out of the sky and makes the economy look healthier than it is. Equivalent to hidden borrowing, in other words.
james
hence my comments, i agree with you 100%
prior to the gst, residential prices rose in tune with wage growth
and also as i said unless we see a change in politics then house prices are likely to be suppported
thanks for the reply
michael
No response from the illustrious Mr Joye? I know you’re there.