Chris Joye: Housing, banks significantly overvalued

ScreenHunter_04 Nov. 12 09.44

Chris Joye has this afternoon continued his admirable attack on the complacency surrounding Australia’s too-big-too-fail banks and the housing market, which are both approaching dangerous levels of valuation. From the AFR:

The common rejoinder one hears from housing risk “denialistas” is that this is all over-hyped, that home values are just recovering past losses.

…But here is what worries me. I estimate that Australia’s price-to-income ratio will be back up around 4.1 times by the end of December. If the market keeps running at its current pace while disposable incomes track wages, the price-to-income ratio will exceed its all-time high by June next year.

The bottom line is that we may be only six months away from Australia’s housing ­market being more expensive than it ever has been. That should give all of us pause…

While my own estimate of the multiples under discussion are much higher I completely agree with the dangers of the relative heights. CJ goes on about the banks:

…the majors’ earnings per share have been artificially boosted by several one-off adjustments, including weaker provisions for bad and doubtful debts and higher ­dividend payout ratios, which cannot be repeated in perpetuity.

A key lesson from the GFC was meant to be that banks would boost their insurance against losses during the good times so they could draw down on this protection when conditions sour.

…A second threat is that regulators seek greater convergence in the “risk-weights” the majors are allowed to apply against the assets they hold relative to competitors. Across their home loan books, which account for 60 per cent of total assets, the majors get to use ultra-low risk-weights of between 15 per cent and 20 per cent of the assets’ actual values.

…As a consequence, the majors hold less than half the capital, and hence have more than twice the leverage, of most rivals, for every dollar of home loans sitting on their balance sheets.

Straight from the Deep T. handbook. It’s great to see this in the AFR.

Unconventional Economist

Leith van Onselen is Chief Economist at the MB Fund and MB Super. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.

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    • Yes, a relatively recent convert.

      But I do seem to recall him focusing on income growth, which fits with his current argument.

    • And how is that relevant to what he said now? Is his current argument discredited only because he never made it before or argued the opposite before? If his point can be discredited because his facts and reasoning are faulty, fine. But is no-one allowed to change their minds AT ALL?? Seriously?

      • No need for strawman, I’ve not said it discredits his current work, I’m just curious. I can’t help but remain skeptical of his motivations until he explains the reasons for changing angles…

      • Does his motive make what he says more or less factual/true/false?

        That’s all I’m saying.

        (Disclaimer: I am not, and never have been, and have no intention of being, an acquaintance, colleague, friend or business associate of Chris Joye)

      • I agree ronfire.

        But around these parts, the motivation of expressed opinions seems to be a key factor behind the criticism of other posters i.e. the attacks on 3d1k, Peter Fraser, skeptics of proposed global warming solutions & so on.

      • In the short (and arguably meaningless) world of the modern media and the blog motivation fills in the gaps that time doesn’t allow, it as easy as pie to make a kinda believable short case only motivated by an unstated agenda.

        Some young folks might be on a journey to explore a postmodern reality as previous beliefs fall with the gold price – that doesn’t mean others haven’t already walked this path.

        Motives not only matter, some might think they are all that matter.

    • dumb_non_economist


      I disagree with ronfire and think your questioning of cj’s motives more than reasonable. It was in relation to your comment (“But around these part…..) after having done the same! That’s why I said “alleged poor behaviour.”

      Most of the denial here of GW isn’t based on much science and that gets hit. 2d gets hit for obvious reasons.

  1. I wasn’t aware some of our banks are worth more than McDonald’s. They don’t serve the best food but they are visibly contributing a lot to the world over than a bank. It’s crazy that what should essentially be a utility can be worth so much.

    Bigger they are, the harder they fall.. on us.

      • The queues in Moscow when the first one opened after the fall of communism were several blocks long. A big mac was actually far more nutritious than what they had been living on under communism.

      • Yep PB – I was there when they started building it, before the wall came down. The food really wasn’t their best assett so I concentrated on their Polar Bears (Vodka & Champagne) – that was the only thing of good quality (& quantity) I could find 😉

    • Yes, they will fall on us big time as the the government will bail them out using the largess of the taxpayer.

    • I agree, and I don’t know where Chris Joye gets the 4.1 price-to-income ratio. Surely it has to be much higher than that? I thought it was more like a multiple of 7-10. If only it was 4.1!

      • I think it’s maybe price-to-house-income ratio, assuming DINK’s.

        I think it’s a given that the 2000’s market shift in expectation of single income payments to dual income payments will be used as an argument to naysay property bears.

        The fact that he is assertively discussing that the market has now moving beyond this to a newer high, is very good, because I think MB showed a graph a few months ago tracking house prices against mortgage loans and the correlation was amazing. It’s undeniable.

        So they just don’t discuss it.

      • +1 According to the latest ABS figures the median Australian pre-tax household income is $68,800.

        By CJ’s 4.1 p/i ratio that would put the median house price at $282080.

        The Sept 2013 RP Data 8 capital city weighted median houseprice is $490,000. That is 7.1 p/i ratio.

      • I think the income includes income from the appreciation of the value of the house! Kinda virtuous upward spiral forever! BOOM!

      • Assumes the double incomes no kids as stated above. But it’s not a problem because we import our kids now.

      • TP,

        I read that article but could not find any relevance to the situation in Australia.

        This bit is particularly odd and of little application down under – who would allow this to happen?

        “Some of them have laid the groundwork for years; one common ploy is to send a son or daughter overseas to a private university as a way to legitimize sending funds out of China. For example, the leaked Chinese central bank report on corruption showed that former ministry of finance official Xu Fangming deposited roughly one million RMB into the bank account of a son studying abroad. Perhaps not coincidentally, the number of Chinese students studying abroad has jumped in recent years. In the United States, it more than doubled to 194,000 in the 2011/2012 school year from five years ago.

        Another popular strategy for gaining a foothold overseas is securing a foreign passport through “immigrant investor” programs.”

      • ReformedEconomist

        Joye’s income number is based on national accounts, is an average rather than a median too. National accs include elements missing from the surveys such as imputed rents. Gross figure is about 120k. Advantage is nice quarterly read. He has changed his tune on house prices of late but is making some sense. This number is not related to a family type. Economy wide average statistic. The useful element is the long term trend.

  2. Well done Chris Joye! He wraps up these points up very well.

    Very good journalism to offset some of the incredibly poor financial analysis coming from the major papers regarding bank shares, property gains, and the confidence fairy.

  3. I would ask again:

    Would GFC happen if FED had started QE months before the crash?

    I guess that QE (or possibility of even more QE) gives everyone in the FIRE sector this amazing confidence that we are not in a bubble and won’t be, e.g. FED/RBA won’t allow the bubble to burst.

    • Yes, I think that is an interesting point. I strongly suspect that the RBA is doing covert QE to support mortgage lending.

      • The RBA QE’s all the time. That’s how it drives down rates. It’s just we can’t get away with quite as much because we are not the world’s reserve currency. As a result the RBA’s QE turns into foreign debt and asset sales to foreign interests.

    • I think more down the lines of “the FED created the crash and held the US to ransom with a 700billion bailout or there would be Marshall Law period. And who got the money…. these same f’ing banks that are now boasting record figures whilst there BS economic recovery keeps it head above the shit stream its travelling in. All of this was guaranteed to be good for the American people and bring the world back from the brink. All I see is every country with a central bank setting the Middle class up to practice the same model. This is a set up and make no mistake about it and they are all practicing and working together in part keeping the assets in the hands of our masters and the 1% by non other than printed paper and BS and we have allowed it all to happen and have no one to blame but our dumbdown selves reallying on the puppeticians to save us.
      Better go buy a house

  4. I Heard a great theory that i would like H&H or one of these fine contributors to dive into,

    basically that if the majority of house transactions are investors (being that first home buyers are scarce) and that the median price of an investment is much higher then a first home buyers. and that could be skewing the overall median price higher?

    • Dunno kastin but I will say this. The market on the Sunshine Coast and Gold Coast where I am looking around are both pretty lively! I think Brisbane has also picked up with asking prices up about 20%. I guess people are not yet getting the full ask….just give it time. (oh and another rate cut or two the RBA have in mind! BOOM!)

      • There is nothing wrong with a median multiple when FHB’s have dropped out of the market.

        The high level of the median multiple is the cause of lack of FHB transactions, the lack of FHB participation is not the cause of the higher median multiple. It is a question of the direction of the causation.

  5. It’s absolutely hilarious – in nearly every other western country they have been madly trying to prop up terminally ill bank balance sheets with QE and variants.

    In aust we have been happy just to watch our banks degrade to these levels. It’s time for another Deep T leverage discussion for some fresh incredularity.

    • flyingfoxMEMBER

      No need. It’s actually in Joyes article.

      As a proportion of the banks’ risk-weighted assets, provisions for dodgy debts has slumped by one-quarter from 1.26 per cent in September 2009 to just 0.95 per cent in June 2013.

      Implied leverage of > 100x if understand correctly and as per a previous DT post.

  6. It’ll be ugly when it all goes boom. The banks will be squealing for mercy, the “investors” with negative equity will be frozen like rats in front of a cobra, screwed whatever they do, and the guys with positive equity will be trying to get out faster than a bevy of bishops at a bordello bust…

  7. “Had the US fund manager Jeremy Grantham taken me up on my November 2010 challenge that he put 1 per cent of his portfolio (or $100 million) where his mouth was, and “short” RP Data-Rismark’s Australian index for three years, he would be down at least $2.2 million today. (And that excludes rents.)”

    Funny how after years of trying to change the foundation of this bet (when it wasn’t going his way), Joye finally settles on using the originally proposed index because it swung his way in the last few months.

    • Exactly Willy-nilly

      Hence the moderation in his assessment of how out of whack price to income ratios are.

  8. Another elephant it the room for us:

    “China’s corrupt officials and crooked businessmen have smuggled billions of dollars overseas, much of which has ended up in real estate in the United States, Canada, Australia and the United Kingdom—particularly in high-end neighborhoods in London, New York, Los Angeles, Sydney and Toronto. Now the Chinese government is embarking on a worldwide hunt to seize the properties with help from foreign governments, according to asset recovery and anti-corruption specialists.”

    It’s time we put an end to foreign investment and stop being a tool for money laundering.

    • We NEED the foreign investment and to be a tool for money laundering! Without it living standards will drop considerably.

    • Doubt if they will get much assistance from Aus govt.
      Cashed up RE investors are the rolled gold of participants in our economy.

    • Thanks Hugh.

      It is good to get some objective context when the spruiker hype reaches fever pitch.

      It would be great to get a Demographia survey every 6mnths. It seems to have a calming effect on the insanity, at least temporarily. If the RBA was serious about taking the heat out of house prices they would do better sponsoring your survey than issuing their regular monthly disingenuous denials.

      Looking forward to your next report.

  9. Overvalued??? LOL

    Please employ someone who knows what they are talking about. Someone who can puts things in perspective. And someone who shows at least a modest level of understanding of how markets work.

    It is just embarrassing to read this stuff over and over again, when it is ALWAYS wrong. And it passes on the ignorance to all the readers, leading them astray as well.

    I read one mindless reader comment where they said house prices were the most expensive they have ever been. Really? He might be right. But then again you could have said the same thing for 90 of the past 100years LOL. So really quite a pointless statement.

    • Of course Australia is different…..! Bubble-shaped house price graphs don’t mean anything in Australia.

      • Actually you are right Phil. Australia is different, just as every country is different from every other. It is only those one dimensional thinkers who look at the US or Japan, and say the same must happen here. Such flawed logic, and shows a complete lack of understanding of economics, capital flows, and the dynamics of market trends.

        And which bubble shaped house price graphs are you talking about? They don’t exist here as yet. Are you on drugs? Or just another in a long line who love to read these bearish blogs because you also missed out on participating in the housing uptrend, and now have a sour grapes attitude?

      • Relax AdrianP

        Your concern is appreciated but you should look on the bright side.

        With so many being ‘led astray’ by those concerned that asset market are inflated by a mix of cheap debt and constrained supply that should enable positive fellows like yourself to acquire plenty of property at what you believe are low prices.

        You should be most pleased that demand pressures are reduced – unless of course you are a vendor or benefit from higher transaction volumes.

        Or were you simply making the point that the current market price is the best estimate of the current value of the property?

      • Logic is deductive reasoning, AdrianP. Logically it cannot be flawed! Wrong in its application or conclusions, perhaps. But those who suggest that if in Japan X+Y = D or in the USA, Ireland, Spain, Portugal or the UK, X+Y = D, then they may have cause to logically deduce that the same thing will happen here. Whether or not one believes the coefficients are the same in Australia as elsewhere will determine how much of an asset base that person has is they are the one that reaches a different conclusion?

      • Actually you are right, AdrianP. Australia is different, just as every country is different from every other. It is only those one dimensional thinkers who look at the US or Japan, and say the same must happen here. Such flawed logic, and shows a complete lack of understanding of economics, capital flows, and the dynamics of market trends.

        And which bubble shaped house price graphs are you talking about? They don’t exist here as yet. It’s all good here and everybody with half a brain knows that our banks are on rock solid grounds. So let’s scrap the deposit guarantee and the bank funding guarantee once and for all. Why should we waste a cent for a white elephant that won’t possibly be needed? Are you on drugs?

      • Logic, AdrianP, will tell you that because you see the sun rise in the east each morning, and set in the west each night that the sun revolves about the earth. But you know that to be false, not because you have disproven it yourself, but because others have, and have told you so. That’s how any property price correction in Australia might reveal itself to you. Not as what you presently see or believe, but what others are telling you now, and that you may see to be true after it has happened. Everything is logical until it is proven to be otherwise.

    • AdrianP, I’ll bite – chomp.
      If you are embarrassed by reading this blog, why bother reading it?
      Re property being fair value: why are FHB absent even when govt throw $15k bribe their way (not to mention what their parents are prepared to chip in)? According to your logic – housing must be too cheap for FHB, that is why they are waiting?
      I look at humanity and see a fantastic resource available, one that could easily reinvent the world if given some breathing space.
      It appears that many who submit to this forum have some space in their lives. They have free time to investigate and share their insights into what is the biggest rort to visit these shores – a distorted RE industrial complex and its attendant parasites more generally known as FIRE economy.
      That the govt (Labor & Libs) are causally in cahoots with the banks with their agenda to tie as many as possible to the treadmill of the most extreme debt levels tells me that we have a way to go yet. Can’t say I am sour, just possibly naïve that I projected onto our leaders a sense of fairness they obviously do not have or wish to hide for the present.

    • Neville Gearless

      Even this guy’s exceptionalism isnt exceptional, a trait of every bubble economy since the dawn of time..
      This Aussie one has gone of for a long time though, amazing what a difference the govt speculator handout of $5b/year makes..
      Not enough, they should levy all businesses and boost (existng) property flipping even more. Call it the “Speculfestor Levy”…

  10. flyingfoxMEMBER

    @UE or HnH. A lot has been made about foreign investors and SMSF investing in property of late. However as evidenced by the employment figures, boomers have started to retire now.

    I don’t know if this can be quantified but what proportion of retirees are taking lump sum super payout (possibly while still working) or a partner still working and investing this into property?

      • There is nothing complicated about the bubble dynamics. As I had stated before, one can estimate the maximum house price fairly accurately. If you use the historical spread of 3% between the official and the retail cash rates, and if you use the standard mortgage stress level of 30% of one’s income (gross, not after tax), the maximum house price using the lowest quality (i.e., interest only) loans will be;

        For the official cash rate of 2.5%, the income multiple of x5.5
        For the official cash rate of 2%, the income multiple of x6
        For the official cash rate of 1.5%, the income multiple of x6.7
        For the official cash rate of 1%, the income multiple of x7.5
        For the official cash rate of 0.5%, the income multiple of x8.6
        For the official cash rate of 0%, the income multiple of x10

        As I had stated before, my base case scenario is that the officials will try everything in their power to delay the inevitable. If the officials somehow become concerned or change their collective mind at all (e.g., hesitate to go all the way down to ZIRP) that will only bring the end game sooner.

        Some people might be naturally gifted debt slaves and serve their bank masters no matter what, even though that may mean eating cat food / $2 noodles and the like. Still, 30% of one’s gross income is a lot and must be close to the limit (note that as one’s income goes up his income tax bills also go up). In this case, what makes people keep going is the hopes that one day they will be able to cash in – aka “short term pain for long term gain”. Near the end phase of a bubble, their hopes will be hanging by a thread.

        That, in essence, is the nature of the bubble dynamics. It can continue as long as the hopes are alive – i.e., as long as house prices keep climbing. Because of the massive transaction costs involved, flat or even moderately increasing prices would translate to losses for house owners, and hence not acceptable. As I had stated before, the bubble dynamics is a one-way street. A bubble can only keep growing until it achieves its full growth potential before an epic bust. That is why it is impossible for the officials to engineer any orderly deflation or “soft landing” in a free market (i.e., without a giant firing squad of some sort).

      • Good note D. And excellent often missed simple points on leverage and IR.

        State governments are addicted to property revenue – it’s stamp now but when the confidence cracks it will have to go to land taxes because that is the broadest base – counter cylical.

      • @Turnitup That is a bag of baloney, and I mean the algorithm/equation they present. The affordability argument.

        Essentially everything is fine as long a interest rates don’t go up. Moreover the bank income test is a secret right? 40 year mortgage?

  11. Given we are very close to debt maxed, the question for me is what else can the RBA/gov do to f&ck the currency and maintain asset growth. My view is not as much as we sometimes cynically think – the bond holders are a pretty powerful bunch.