Sunday, May 29, 2011

Getting my head examined - a Chris Joye rebuttal

Don't get me wrong. I agree with Chris Joye on some things - lowering the inflation target (perhaps not right at the moment), pushing for a more streamlined NBN, and supporting Malcolm Turnbull's political ambitions.

But when it comes to the housing market the guy with all the numbers is happy to overlook the strikingly obvious and adores a verbal stouch with his foes - the group he calls 'housing nutters'. In fact he just recently recommended the following 

At the same time, anyone who claims that a 1% year-on-year retracement in dwelling values is a major asset-class event (cf. the share market frequently falling more than 5% on a given day) needs their head examined, with the greatest of respect. And I sincerely meant that latter caveat: you genuinely should seek medical advice if you are convinced that house prices are plummeting. 

Let's take his advice and examine what is in my head (noting that I don't believe a 1% year-on-year fall in national home prices in isolation is a concern). 

Joye often likes to draw attention to the low volatility of the housing market compared to the share market (eg here and here). But he neglects a few important differences. 

1. The housing market has at best monthly data only. Moreover each month's price data point is essentially an average. The share market would be far less volatile if you measured it that way and averaged away each month's price extremes. Not that volatility represent risk in any case. 

2. The share market is an equity market. If you want to compare like with like you need to compare the change in home equity to the change in share prices. If there is $1.7trillion in housing debt outstanding against $3.5trillion worth of housing, you can double any housing price change to calculate the change in equity of homeowners on average. Of course prices are set at the margins so perhaps for the price setting buyers and sellers the leverage, and importance of small price movements, is even greater. 

3. The negatively geared investor sets the market price (apart from the recent burst of FHBs). This means they are losing money every year. Any small decline in value decreases their equity substantially in addition to losses already incurred. 

4. The marginal homebuyer is heavily leveraged - 80% plus. This is not the case in the share market. Remember, leverage works to improve both gains and losses. 

5. The wealth effect is much stronger in the housing market than other markets, particularly due to leveraging and the sheer size of the asset compared to household incomes. 

6. Cost of home ownership is much greater than simply the interest cost. For most homes around 25% of the gross rent is spent on annual costs (refer to 3.) 

7. Housing market crashes, while they feel almost spontaneous, actually take some years to eventuate.

Irish housing - 5 years to fall 28%, or 0.41%/month

US housing - 6 years to fall 31%, or 0.38%/month

UK - 2 years to fall 21%, or 0.8%/month (and still 18% down from their peak 4 years later) 

8. Lastly, I feel sorry for anyone who shared Joye's property optimism and bought into the Brisbane or Perth property markets in the past two years.  While the share market hasn't been crash hot, 6% returns on cash has been pretty flash.

Anyway, if these notes are a sign of a mad man, well so be it ;-)


  1. cam, i like your blog. you should however avoid outright lies. there are legal risks. Joye has actually argued that individual homes have very high shares like volatility/risk of 15 to 20% pa. Rismark have published their analysis on this here. You should apologise...

  2. Anonymous (chris?)- outright lies? I'm happy to retract anything that is an outright lie if you could be more specific.

    I agree with Chris on his analysis about lowing risk in the housing market through diversification - that's why I didn't make any points about that argument.

    The only points I made are that there are important difference when comparing the share market and the housing market - the prices measure different things, they price measures themselves are very different (averaged monthly v prices by the second), and the marginal price setting buyer/seller has very high leverage in the housing market, and is often already making annual losses.

    In fact I also agreed that 1% retraction year-on-year is not cause for great concern - IN ISOLATION. If prices had not followed such a boom path this decade, household debt had not skyrocketed, and the world's major economies had not experienced their own housing downtrun and recession, then there would be no discussion whatsoever on small moves in the housing market.

    The simple fact is that Joye loves to overlook many key points in his analysis, which is disappointing.

  3. Edited the rewrite history comment (it was not supported by the rest of the post). Got to be fair and stick to the arguments at hand.

  4. Great debunking, Cameron. Cheers :)

    If we want to nit-pick over unfounded comments, I'd love to see Joye's data on the "share market frequently falling more than 5% on a given day"... Perhaps he would like to define "frequent"?

  5. Interesting commentary on Chris Joye... have you read this profile of him...

    Chris Joye: A Profile