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:

The best definition is that which is employed by the RBA to calculate the dwelling price-to-income ratios linked above. This measure is based on the ABS-compiled National Accounts and not the “survey information” that is also published by the ABS

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:

  1. Australia’s internationally high home ownership rate of 70%;
  2. Australia’s incredibly low mortgage default rates, which is a fraction of overseas levels; and
  3. the fact that the value of Australian housing has been rising, not falling, indicating that households are having little trouble affording to purchase properties.

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.