Every Wednesday we’ll be publishing some of the most extraordinary market distortions on this ball of dirt. We call it the WOW, as in “Wow, what a crazy world!” or “Wow, that’s truly insane”. We are eager for the day we struggle to find markets to bring to your attention, though that doesn’t seem like any day soon.
Market dislocations occur when financial markets, operating under stressful conditions, experience large widespread asset mispricing.
Welcome to this week’s edition of “World Out Of Whack” where every Wednesday we take time out of our day to applaud insanity, laugh, poke fun at and present to you absurdity in global financial markets in all it’s insanity.
Greenhaven Road Capital commentary for the third quarter ended September 30, 2022. Q3 2022 hedge fund letters, conferences and more Dear Fellow Investors, The Fund is enduring its worst drawdown since inception. We were down again in the third quarter, bringing year -to-date returns to approximately -59%. Returns vary by . . . SORRY! This Read More
While we enjoy a good laugh, the truth is that the first step to protecting ourselves from losses is to protect ourselves from ignorance. Think of the “World Out Of Whack” as your double thick armour plated side impact protection system in a financial world littered with drunk drivers.
Selfishly, we also know that the biggest (and often the fastest) returns come from asymmetric market moves. But, in order to identify these moves, we must first identify where they live.
Occasionally we find opportunities where we can buy (or sell) assets for mere cents on the dollar – something we will cover more extensively soon.
In this week’s edition of the WOW we’re covering overpriced global real estate:
Contestant #1: Hong Kong
South of the motherland things have gotten a bit… ahem, hairy. HK has long been the escape hatch for frightened mainland Chinese capital flows. It stands to reason that real estate – always and everywhere – remains one of the best methods of laundering money, and so HK real estate has benefitted.
Purely by the numbers, it doesn’t make a whole lot of sense. Let’s take a peek, shall we?
Income to asset ratio: At 19 times gross annual pre-tax median income, Hong Kong real estate sure isn’t cheap.
In fact, US$1 million dollars will buy you just 20.6 square metres of property – barely enough to swing a cat in.
There are signs of stress with negative equity cases have recently jumped as foreclosures double from this time last year.
And as the South China Morning Post reports:
“Billionaire Lee Shau-kee, Hong Kong’s second-richest man, expects home prices in the city to remain under pressure, with about 10 per cent further downside to be expected before a bottoming pattern sets in.”
The positives are that Hong Kong has ever present geographical constraints. Put simply: there is very little land available for development. Then we have the fact that it’s probably not fair to judge real estate here by incomes earned within the confines of Hong Kong since – as mentioned – it’s been foreign demand (from mainland China) driving this market to a large extent.
Side note: While the focus today is on overvalued RE markets, as an investor I can’t help myself from pointing out that with a P/E ratio of just 9x, Hong Kong’s equity markets are today the cheapest in the world, with the Hang Seng Index trading at the biggest discount to global shares in 15 years.
As a reference point consider that most major stock markets typically trade at a P/E of between 15-20x, so we’re looking at an equity market some 40-50% of its highs and an overvalued real estate market at the same time.
Investors can look to going long the HSI and short Hong Kong REITs.
Contestant #2: Sydney
Welcome to the world’s largest island: the only country in the world I know of that actually eats its own emblem (the Kangaroo) and where in Sydney US$1 million will get you just 41.2 square metres of “luxury”, enough to bring your partners cat for a joint cat swinging party.
Residents of this beautiful city have to fork over an average 12.2 times their gross median income for somewhere to hang their hat.
Factors to consider:
- A substantial slowdown in commodity sector.
- Recent clamping down by the Chinese government on Mainland capital outflows.
- New laws passed by the Australian government restricting foreign ownership of real estate:
Sentences may stretch to three years and fines to A$637,500 ($607,000) for illicit buyers, with penalties also on third parties knowingly complicit in violations, Prime Minister Tony Abbott said Saturday in Sydney. The steps are needed to give the public confidence that foreign-investment rules on property purchases are being enforced, he said.
- And… increasingly fearful Australian banks are cutting back on lending to foreign purchasers.
Moving from one beautiful, albeit insanely priced, city to another our last contestant for this week is…
Contestant #3: Vancouver
Ignoring the collapse in energy prices, Vancouver’s real estate market has sailed on to ever greater highs, boosted by supply shortages, historically low interest rates, and a shedload of “boat money”.
According to the Real Estate Board of Greater Vancouver who have been tracking the average price of all properties in their region since 1977:
The average price of a single-family detached home in the Greater Vancouver area has increased as much in the past five months as it did from 1981 to 2005.
Spending 10.8 times the median gross incomes of the average Vancouverite only makes sense if you’re not basing your purchase criteria on the average Vancouverite’s income. It makes sense if you’re living in Shanghai, worth more than Gwyneth Paltrow and fearful of your government.
Vancouver is second only to Hong Kong as a place to stash mainland Chinese money.
The perceptive among you will notice an overriding theme here. Actually two themes.
One is that scared Chinese money has been fuelling all of the above markets for some time. That promises to accelerate if/when the CCP really crack down on capital flight. In such a scenario I’d rather be long Bitcoin as Chinese money flees via a different route.
The other notable theme, one which sadly pervades all markets like a plague is that the cost of capital has been so severely bloodied, beaten up and suffocated by central bankers. And so today we have actually have taken the already absurd concept of ZIRP (zero interest rate policy) one further with NIRP (negative interest rate policy).
When debt has a carrying cost untethered to any fundamentals, is it any surprise that we find such absurdities?
Mirror mirror on the wall which of these markets blows up first?
We’d love your feedback and if you have a market you think worthy of covering please send it to me here.
“Generally our banks are very cautious with their lending. We cannot compare ourselves to other countries where people can buy without a deposit. [A crash] has never happened,” – Harry Triguboff, Australian property developer billionaire