He reckons the last six weeks of the year could be very good for resource investors. Good advice to act on now
Australia's most vocal proponent of the country's property market Friday challenged Wall Street investment guru Jeremy Grantham to wager A$100 million on the outlook for the country's housing prices. Christopher Joye, managing director of property research group Rismark International, challenged his equally vocal sparring partner GMO Capital founder and chief investment strategist Grantham to put his "money where your mouth is" on the issue of whether Australia really is in a property bubble. Grantham's downbeat views on Australia's home prices are "sensationalist and spurious," Joye said. Joye challenged Grantham to bet the A$100 million over a three-year term, basing the outcome of the bet on movements in the RP Data-Rismark Australian Capital Cities Dwelling Price Index. For every 1% rise in the index, Grantham would pay away A$1 million, Joye said. But for every 1% decline in the index, Grantham would receive A$1 million away. The trade would be settled at the end of three years with monthly margining to manage credit risk. The high stakes wager comes on fresh warnings from Grantham in his latest quarterly investment letter that house prices in Australia are set to fall as affordability is stretched and consumers are already spending too much on homes. Australian house prices have grown strongly over the last 20 years. In major capital cities such as Sydney and Melbourne, the average median home price has doubled in value in eight years and quadrupled in 21 years.
"If you actually have any conviction regarding your predictions about the 'time-bomb' that is Australia's A$3.5 trillion housing market, we would ask that you put your money where you mouth is," Joye said. Grantham has repeatedly argued house prices in Australia are overvalued warning a speculative bubble was set to burst. At one time, he estimated housing in Australia was overvalued by 42%.
The Reserve Bank of Australia has also waded into the debate saying the bulk of mortgage-related debt is held by those most able to service it. RBA Deputy Governor Ric Battellino said earlier this year the ratio of house prices to income "is not that different from most other countries." Joye has been supported by analysts at Goldman Sachs, Westpac, Commonwealth Bank of Australia, Australia and New Zealand Banking Group and HSBC. Strong population growth and claims there is a chronic shortage of housing in Australia are often cited as reasons to expect strong demand will underpin house price into the future.
But some foreign banks, including Morgan Stanley and the International Monetary Fund, have called the property market overvalued.
Warring over the issue of house prices in Australia has resulted in some strange goings on. Academic Steven Keen walked from the nation's capital Canberra to its tallest peak at the start of the year having lost a bet with economist Rory Robertson that house prices would drop by up to 40%.