You’ll remember this quote we relayed to you from one of Christopher Joye’s recent blogs at Business Spectator:
“There is an investment category out there that you likely have a large chunk of your wealth tied up in. The problem though, is that it is literally 11.6 times riskier than ‘cash’… Australian equities also don’t stack up relative to fixed income investments, such as bank bills and government bonds. I am pretty sure one could also add AAA-rated Australian home loans and A1+ corporate debt to the fixed-income outperformers…”
It was his ‘bombshell’ moment. The ‘revelation’ that investing in shares is a risky game. Thanks for the info!
Shares are risky, but not property. Investing in property and residential mortgages is much safer apparently. In fact, according to Joye’s ‘bookend’ appearance on the SBS show Insight:
“We had 11.1% house price growth in 2009. House prices have continued rising in the first month of the year – in January. Melbourne experienced 16% house price growth last year and then Sydney also experienced around 11% house price growth. The national housing shortage is estimated to be around 200,000 homes… ANZ project that will be 400,000 homes by 2015.”
And the price pressure is on the up:
“We will have a 62% increase in our population. We are looking at 7 to 8 million people living in Sydney and Melbourne individually. One of the concerns I have is the 36 million forecast is very conservative. It assumes our population growth rate today halves so it will place huge pressure on prices.”
It’s the typical spruikers mantra. A population increase means more demand for houses which means higher house prices, which means, ‘Buy now before it’s too late!’
By the way, we’ve referred to it as a ‘bookend’ appearance because El Joye was asked one question at the beginning and then one at the end. And that was it. But in just a few words he managed to express almost every property myth there is.
Hats off to him for having the argument so fine-tuned that it can be rolled out under any circumstances. Even on the occasion when you’re just asked two questions during a one-hour show.
Anyway, we thought it was about time we looked at the Transforming America’s Housing Policy conference that was held at New York University in February 2009.
We thought we’d look at it because it’s the conference that El Joye has banged on about ever since, usually with statements such as, “While presenting to the Obama Administration alongside Robert Shiller last year…”
It’s obviously an appearance he’s proud of. You can tell that by the number of times he mentions it.
It was Joye’s opportunity to show the Americans how fab the Australian housing market is. And how, if only they’d done things the same way as us then everything would be fine.
So, yesterday afternoon, we settled back to listen and watch the video recording of the panel discussion that included Robert Shiller (or ‘Bob’ as Joye referred to him), Raphael Bostic, Eric Stein, and of course Christopher Joye.
Click here to watch and listen for yourself. It’s discussion Panel 4.
Only a few minutes in and it was pleasing to hear Robert ‘Bob’ Shiller say:
“This financial crisis was caused by a failure to manage real estate risk. We put people… no matter how low income… into a leveraged position in local real estate. Highly leveraged, and if they’re low income, with their entire life savings. It’s hard to believe it, but that was the conventional wisdom… Larry White was saying… people had this strange idea that home prices only go up, and he couldn’t fathom how people would have thought that…”
Sound familiar? Ask any spruiker or property investor and they’ll tell you, you’ll always make money on property because prices always go up.
Even the feedback we received from yesterday’s Money Morning article, readers told us our example was wrong because we should allow for property doubling in value every ten years.
And that was from readers who class themselves as property bears. The idea that housing doubles in value every ten years and that it always goes up is brainwashed into almost every Australian.
We don’t take into account property doubling in the next ten years because we don’t believe it will happen.
The fact is, the idea that property is guaranteed to double in seven or ten years is a lie. Property is not a magical investment that can be detached from every other investment. It is inherently risky. But look, don’t take my word for it, just ask Christopher Joye how risky property is…
“What?” I hear you ask. Yep, straight up. Here’s a quote from El Joye I’ve taken from the video I mentioned above. And if you don’t believe me, watch for yourself. El Joye starts babbling on at about the 20-minute mark:
“Our research shows the single family home is a phenomenally risky investment. It’s around six-times the risk of a broad based property index. In Australia the single family home has around a 20% volatility, so volatility akin to equities and yet the average family invests 50% to 60% of all their wealth in the world in this highly idiosyncratic asset… The system [financial markets] had too much leverage, and particularly households had geared to high levels… They’re leveraging against what is an incredibly risky underlying asset.”
Got that? We nearly fell off our $99 Officeworks chair when we heard those words. We finally have an admission from El Joye that residential housing is a “phenomenally risky investment” and an “incredibly risky underlying asset.”
Well, well, well. Who’d have thought it? An admission that confirms everything we’ve said about residential property for the last eighteen months.
That residential property has been bid up to such a high level, and that the leverage is so enormous, it has burdened Australian households with a “phenomenally risky investment.”
It confirms exactly what we wrote a few months ago, that property is now at least just as risky as share investing – and we know how risky that is.
But because of our comments and our busting of the conventional wisdom myth, your editor has received a barrage of abuse from Joye and his property investing cronies. All of it claiming that your editor is a liar for saying that property investing is risky.
Yet all along, Christopher Joye was completely aware that in February 2009 he himself labelled the family home as a “phenomenally risky investment.” That’s taken the wordage even further than us.
And remember, he’s stating that a family home is a “phenomenally risky investment.” He’s not referring to investment properties or commercial real estate, he clearly states the “family home.”
And despite all this, El Joye and the other property spruiking bandits insist residential housing is a safe investment. An investment where prices always rise. An investment which according to his recent article, is less risky than shares.
But I’ll let you figure out what words you want to apply to someone who states one thing to an American audience and then states the opposite to Australian home owners.
If you ask me it’s a downright shameful disgrace.
All I can say is, how convenient it is to tell the truth when you’re trying to sell an idea to an American audience. An audience that has already experienced a housing crash and therefore the Joye solution will supposedly help prevent it happening again – or make it worse in our opinion.
Whereas to the Australian audience, well, the crash hasn’t happened yet. Joye wouldn’t want to ruffle anyone’s feathers. And besides, the money in the Australian market is to be made selling research to fund managers and the real estate industry.
Those customers won’t be best pleased if El Joye starts talking about housing being a “phenomenally risky investment” or a “risky underlying asset.” That’s not the way to keep dollars flowing through the door.
Look, I can’t believe it’s taken your editor over a year to come across this gem. Maybe others have spotted it, but we can’t say we’ve noticed.
Yesterday I said that Joye’s credibility was in negative territory, well, after viewing this video, in our opinion his credibility has gone off the scale and through the floor.
So far, Jason Clout at the Australian Financial Review (AFR) is the only mainstream journo to call Joye out for having soggy numbers. We can only hope that the mainstream journos really do start to take everything that Joye says with a gigantic pinch of salt.
The next time we see Joye interviewed we’ll hope to see the journo ask him to explain what he means by Australian family homes being a “phenomenally risky investment.”
It’s about time the mainstream press stopped thinking of Chris Joye as an independent objectively minded real estate analyst. The reality is that he’s a spruiker with a vested interest in keeping the property bubble going for as long as possible.
And then, when it pops, he’ll turn up like a white knight saying, “Have I got a solution for you!”
Can you trust another word Christopher Joye writes? And of equal importance, does the mainstream press have the balls to finally challenge what he says?
Let’s wait and see.
Kris Sayce
for The Daily Reckoning Australia
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