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One doesn't necessarily go to Playboy magazine for insight into financial trends, but reports in the May edition suggest that Playmate of the Month Jamie Westenhiser, 23, is abandoning modelling "to take up real estate investing". (Ever since Business Week's infamous 1979 cover story, 'The Death of Equities', investors have looked to the print media not only for clues as to market direction but for contra-indicators on market direction.) The Washington Post and Canada's Globe and Mail gleefully take up the story (for the latter: "Mania over real estate spurs fears of a crash"). Parental advisory: for anyone interested in Ms. Westenhiser's credentials, they can be checked by conducting an image search on Google. But you will need to ensure that SafeSearch is off.
Daniela Deane of the Washington Post cites a study by the National Association of Realtors showing that almost 25% of US homes bought in 2004 were bought as investments. According to the Office of Federal Housing Enterprise Oversight, between 2000 and 2004, house prices in the US rose by 50%. Economist Robert Shiller also points out that real (i.e. inflation-adjusted) home prices for the US as a whole increased by 52% between 1997 and 2004.
We suggested earlier this week that in the context of overall asset allocation, hedge funds might be experiencing a secular rerating as investors look (perhaps somewhat belatedly) for less market correlated vehicles. Since wealth is not evenly distributed in the US or anywhere else, there's a case to be made (though perhaps not too vociferously) that property is undergoing a similar sort of process, particularly for those who can afford to diversify their real estate holdings. On balance, however, it strikes us that the rise of real estate as an asset class has more the smack of a bubble about it, just as the tidal wave of Playboy models and others into property speculation has more the feel of acute recency bias coupled with overconfidence that is predestined to end with lots of arses being handed to their owners. As Shiller said earlier this year,
"It is true that, for the United States as a whole, real home prices were 66 percent higher in 2004 than in 1890, according to the index my research assistants and I have put together. But all of that increase occurred in two brief periods: the time right after World War II and since 1998.
"Other than those two periods, real home prices overall have been mostly flat or declining. Moreover, the overall increase, including the booms, is not very impressive -- 0.4 percent a year.
"Why then do so many people have the impression that home prices have done so well? People remember the prior purchase price of a home from long ago and are surprised at the difference between then and now."
Searching for someone - other than herds of investors themselves - to blame for triggering a succession of asset 'bubbles' (technology stocks, then bonds, then property and other supposedly 'alternative' assets as investors start to exhaust their options) is probably redundant but always fun. One doesn't need to be Sherlock Holmes to point the finger at the Fed, particularly at a Fed chairman who tends to deny the very existence of bubbles in the first place and so who is not perhaps well suited to comment on the matter. Todd Stein and Steven McIntyre of the Texas Hedge Report make the point slightly more acerbically:
"Greenspan's solution to every economic crisis has been to print more money - often by cutting rates which has the effect of increasing credit. The Alan Greenspan who several decades ago clearly understood the Austrian school of economic thought (purge speculative excesses before they get out of hand) and the value of a gold-backed sound currency is gone. Turned to the Dark side did he. With every scramble to frantically pump in credit at the first sign of a potential economic slowdown, Greenspan's transformation from a sound central banker (e.g. Paul Volcker) to an intellectually corrupted and pandering politician (seeking to keep the public working and the stock and real estate market bubbles propped up at all costs) was made complete. The debt and deficit ridden house of cards that certain areas of the US financial system have become was not going to collapse on his watch."
Not that the real estate 'bubble' is necessarily limited to the US; the European Central Bank has recently expressed concern about housing price 'bubbles' in Spain, Ireland and France. Unfortunately for continental Europe, they have a one-size-fits-all interest rate policy that sits uneasily with recession at the core and property speculation at the fringes. Well, they voted for it. The OECD on May 24 cut its growth forecast for the euro zone to 1.2%. A rate hike, though it may now be off the cards until 2006, is unlikely to help. In a purely US context, economist Ed Hyman suggests that every Federal Reserve interest rate tightening cycle since 1970 has involved at least one high-profile financial calamity. Developments in the auto sector and from the ratings agencies have already goosed proprietary trading desks and hedge funds (all the way down the line to insurers and pension funds?) to the tune of billions of dollars. It is not unreasonable to think that the residential real estate market in a variety of places might supply the next shock to a rather fragile-looking financial ecosystem.
Tim PricSenior Investment StrategisAnsbacher & Co Ltd.
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