One of Australia’s best-known and respected property figures (and my old friend and sparring partner at Crikey) Chris Joye recently proposed a novel idea to US-based hedge fund boss Jeremy Grantham. Joye earlier this month issued a challenge — offering Grantham the ability to effectively “short” the Australian housing market by investing $100 million in an index based on a capital city dwelling index.
So far, it appears than Grantham has not yet taken Joye up on his offer. While Chris awaits a response, I’m willing to offer up a slightly different wager. That is, we personally bet $A50,000 that in five years from now (October 2015), Australian capital city house prices (based on Joye’s own RP Data/Rismark National House Price Series, or any successor) will be lower in real terms (adjusting for CPI) than they were in October 2010. Instead of paying $50,000 to the other party, the loser shall donate $50,000 to a registered charity nominated by the victor (nominations to occur before the bet occurs).
The wager is somewhat different to what was offered Grantham. For a start, we would be putting our own funds on the line (Joye’s offer involved using counter-partiers). Further, Joye also warned Grantham that the transaction would “take several months to facilitate (and cannot be guaranteed)” whereas this wager would be legally binding as soon as Chris accepts it (if he chooses to).
History (and the constant wiliness of Australian governments to waste taxpayer dollars propping up the housing market) appears on Joye’s side. Further, Joye appears particularly confident in his views that housing prices will not depreciate, noting that:
Australia’s dwelling price-to-income ratio is not 7.5 times, as Grantham would have us believe. Based on the best available measures, it is just 4.6 times as at June 2010 (and likely to decline in the third quarter). Furthermore, this 4.6 times estimate has been independently verified by the Reserve Bank of Australia, Goldman Sachs, Westpac, CBA, ANZ, HSBC and other third-parties.
My view of the property market, and especially the sages at the RBA and CBA is somewhat different. As for accepting the advice of such luminaries, it should be remembered that the Commonwealth Bank produced a staunch defence of the housing market in September in which it used highly misrepresentative data. Not to mention the fact that the CBA (and the other big banks) have hundreds of billions of dollars in residential loans and face near ruin if Australia suffers a US-style meltdown. In reassuring the masses as to the non-existence of the housing bubble, the banks are very much talking about their book.
A five-year timeframe is required for the wager because the property market, as the United States and Japan experiences have shown, is a remarkably inefficient beast — with prices separating from actual values for long periods. While property bulls will claim that Australia is suffering an acute housing shortage, such theories are not borne out in rental prices, which have actually decreased in recent years.
Joye told Grantham recently that, “if you actually have any conviction regarding your predictions about the ‘time-bomb’ that is Australia’s $3.5 trillion housing market, we would ask that you put your money where your mouth is”.
Chris, you know my number — give me a call and we’ll draft up the legalities.
*Adam Schwab is the founder of Zoupon and Living Corporate Apartments, and the author of Pigs at the Trough: Lessons from Australia’s Decade of Corporate Greed.