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A bet on the health of the Aussie property market

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Published on: Thursday, November 11, 2010

Are we or aren’t we in a property bubble? Investment experts, property analysts and economists have been debating the health of the $3.5 trillion Australian housing market for some time. One expert has put his money where his mouth is wagering millions of dollars on his belief that strong demand will underpin houses prices into the future. Christopher Joye, MD of Rismark International, joins Peter Switzer on Sky News Business Channel’s SWITZER.

The bet

“Jeremy Grantham manages $104 billion in Boston for a company called GMO and he’s known to be an investor legend and he has made some very large calls,” says Joye. “Effectively he has said the biggest bubble he has seen in human history is the [Australian] housing market.

“We pointed out, alongside the RBA, Goldman Sachs, ANZ and Westpac, that his math was horribly wrong,” he says. “He basically said that house prices were 7.5 times income. We said, ‘No that’s wrong, they’re about four to five times incomes’.

“Then the Wall Street Journal covered this debate last week between myself and Mr Grantham and so we decided to throw down the gauntlet and said, ‘Why don’t you put your money where your mouth is?’

“He reiterated his view that this is the biggest bubble of them all, the mother of all bubbles, so we have said that we can facilitate an opportunity for him to back his predictions financially … that we can structure a transaction where he can effectively short our national house price index to the tune of $100 million over the next three years. Needless to say, we’ve yet to receive a response.”

A bubble?

As for the claims of a bubble, Joye says, while the short-term outlook on the market is not positive, it is not indicative of a property bubble.

“There are a few risks. We’re actually pretty bearish over the next 12 months in the housing market. We’ve been forecasting since the start of the year that there’d be no capital growth in the second half of 2010 and that’s what has materialised thus far,” he says. “There is absolutely a risk that if the RBA raises rates by another three to four times, that will see further downward pressure on prices so we’re not expecting any capital growth in 2011. In fact, we think there is the risk of modest price falls over the next year.

“We don’t think that it’s a bubble that will be bursting,” Joye reiterates. “We think the [housing] valuation ... is in line with where it’s been over the last seven years. Over the next three years, we think, through the cycle, prices will grow in line with disposable incomes.”

Check out Peter Switzer’s SWITZER on Sky News Business Channel, Monday to Thursday from 7pm.

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