The property industry’s twisty statistics’

The property industry’s twisty statistics’

The REIV have released their June quarterly statistics which show a seasonally adjusted 2.4 per cent rise in the median house price with the comment

“The release of the REIV’s June quarter median prices should help encourage a few more sellers into the market over spring as it shows the price falls recorded in 2011 have been recovered.”

This takes Melbourne’s median house price from a ‘revised’ $549,000 in the March quarter of this year which – (as Terry Ryder also noted Tuesday last week and myself on Monday Last week) – is a ‘not so insignificant’ drop of – 2.23 per cent decrease to the figure the REIV initially published in April of $561,500 – to the now ‘seasonally adjusted’ June median of $562,000.

In other words, had the numbers been taken on face value, without subsequent revision, Melbourne would have simply been treading water.

All of this means little to the average buyer who simply reads the headlines and has little time to dig into the detail – however at the time, the REIV heralded the first quarter of 2013 to be the ‘strongest March quarter in a decade’ which was somewhat surprising considering the ‘unadjusted’ March median actually dropped -0.9 per cent.

Of course, the only reason it could be stated as such, was because their December 2012 median had also been ‘seasonally adjusted’ & revised from $555,000 to $534,000 – a drop of -3.7 per cent.

The REIV only started seasonally adjusting figures at the start of this year, therefore the December adjustment was made ‘post’ the initial release in which the REIV claimed a 7.8 per cent jump in the median house price (!) under the heading ‘Growth returns to Melbourne housing market.’

I remember this well, because it prompted a joyful remark I overheard one agent relay to his ‘investor’ client, that this would equate to more than “30 per cent capital growth for Melbourne over the following 12 month period if it maintained pace” – thankfully a comment that will remain pure fiction.

As a general rule, seasonal adjustments are calculated by looking at the ‘average’ seasonal shift during the same quarter over a lengthy time scale. The information is then used to calculate the amount to either add, or subtract, from the raw data. And whilst it can be useful from a trend perspective (smoothing out the bumps,) there is scant information on the REIV website to explain how a drop of -0.9 per cent can be converted into in to a somewhat robust ‘rise’ of 5.1 per cent in a market which, although improving, was – at the time – certainly not doing as well these numbers would indicate.

The reason figures are revised, is because all data providers suffer from a lag in reported results that typically filter in over the 3 month period ‘post’ the quarterly release from valuer general data – the most authoritative and comprehensive source of sales information we have.

Therefore, the median price home buyers and investors are reading for this quarter, and the emphasis that is put on it as newspapers go to town with boom or bust headlines, is likely to alter significantly when the next release is due and is therefore is arguably a misleading ‘quarterly’ indicator of true market movements.  In other words – any ‘newly’ released quarterly data needs to be taken with a ‘pinch of salt.’

With this in mind, it makes the daily index – which is neither seasonally adjusted and would also miss a wide proportion of lagging results – laughable.

Investors are often fixated on median prices.  The major investment magazines have extensive tables of figures and percentages covering the back pages. Agents use them to their own ends with comments such as ‘prices have increased 10 per cent year on year over the past 5/10 years for such and such a suburb.’

However whilst the median figure may have increased – the ‘middle’ figure of all cited sales – individual property prices, and the changes a property may go through in terms of renovation and extension, which would therefore warrant a higher capital price outside of natural increases, is not always represented in the information provided, and it should also be noted, that each provider uses a slightly different methodology when collating their statistics.

For example, the REIV record a ‘seasonally adjusted’ 8.4 per cent rise to the median from this time last year which seems to suggest Melbourne is coming on leaps and bounds.  However, the ABS show an increase of just 1.1% (to March 2013) – APM: 6.1% (to June 2013) and RP Data: 3.3% (to June 2013) making the REIV’s median figures higher that of every other data provider.

However, the REIV are not the only culprits when it comes to published data misnomers. As economist Leith Van Onselen pointed out to me in a conversation we had regarding APM’s results.

“In its March quarter release, APM reported that Melbourne house prices led the nation, rising by 3.6 per cent over the quarter to $538,922. What was not mentioned in their commentary, however, was that some of Melbourne’s reported strong price growth was caused by a -1.1 per cent downward revision to the December quarter……And in their June quarter results, APM once again reported that Melbourne led the nation, recording 5.0 per cent growth over the quarter and 6.1 per cent growth over the year. However, part of this strong quarterly rise was caused by a downward revision to March’s median house price to $527,245, without which Melbourne would have recorded 2.7 per cent growth…..As Leith points out, without the subsequent revisions “ Melbourne’s annual price growth would have come in at a more moderate 4.2 per cent.”

One indication towards the stark contrast in REIV statistics is because unlike the other indexes, they do not stratify their median figures to reflect different aspects of each housing type outside of the broad description of ‘units’ and ‘houses’ and this creates significant problems for those using the information as a source of market analysis.

In REIV terms, a unit could be a small villa on a subdivided block of typically six to eight free standing or attached dwellings – a one or two bedroom apartment or flat, in either a low rise or high rise block – a high spec townhouse on a ‘side by side’ subdivision – or a bedsit.  Obviously, this can create distortions when assessing the information.

The same is the case for housing.  Median house prices cover detached houses, terraced houses, semi-detached houses, residential warehouse conversions, holiday houses and duplexes.

Because the REIV don’t distinctly classify their results, we also see big differences in individual suburb changes. For example, according to the June stats, Hawthorn’s unit median has increased 20 per cent from the last quarter (!?)

However, there should be no confusion here – individual unit prices in Hawthorn have not increased 20 per cent – this is median data, and without stratified statistics, the median price can easily be boosted with different property types being lumped under the ‘unit’ banner – to publicize these figures, with full knowledge of the reaction it will create, should be an area of concern – yet one which is ignored in the main stream press.

Albeit, from an anecdotal perspective, property prices in Melbourne have increased throughout the course of 2013 – as an example – a unit which based on comparable data from late 2012 and early 2013, would be worth anything in the region of $420,000-$440,000 – under current competition, often ends up selling 2-3 per cent higher, an effect which is primarily noted in the inner and middle ring established suburbs of the city where auction sales predominate and an intense level of investor and speculative activity is evident.

Most results are staying broadly within these parameters, however; notwithstanding, I’ve seen some crazy activity of late as mini bidding wars in various pockets have rippled across all price brackets.

This can have quite a dramatic impact on both vendor expectation (as owners see neighbouring properties sell above their pre-estimate of value) and buyer physiology, as property shoppers realise they need to ‘up the budget’ to exceed what is perceived to be some kind of boom time terrain producing gains that cannot be sustained over the resulting period – and in the current economic environment – will most likely eventuate to be nothing much more than a short term rally.

However, as most sales across Melbourne are conducted private treaty, the effects on the median data across the board would be minimal, and really only feed into inner city figures where auctions are the preferred method of sale.

In truth – from a macro perspective, as the latest RPData report highlights, “In five and a half years, growth in capital city home values has not increased at a rate higher than inflation” and it should be noted, Australia is facing some significant headwinds which will have an impact on the property market in the months and years ahead.

Full time jobs growth is weak and both hours worked along with levels of underutilisation are deteriorating.  As the mining construction boom unwinds, non mining industries underperform, and we pull in our belts with fiscal consolidation, it’s likely we’ll see little change over the months ahead. The short term data is volatile and somewhat unreliable albeit, the long term trend is clear.

We’re entering an era of slow growth – and it’s yet to be seen if it will be stable growth. In this respect, when you lift the blanket on unemployment data the trends are concerning and certainly not as good as the headline rate suggests.

Outside of keeping interest rates low, or offering grants for new homes to enable buyers to take on a larger proportion of capital debt in an effort to boost the construction sector is producing minimal impact for new home owners – and as I wrote last week, there are no long term sustainable solutions offered from either side of politics.


The speculative behaviour we’re currently seeing in various pockets of Capital city markets as investors lead the widely spruiked ‘housing recovery,’ neatly packaged under the words ‘typical market cycle’ as different states go through their own ‘wax and wane’ periods of supply/demand activity, will have far wider impacts for our younger and future population of buyers than I would argue is fully recognised across the broader population that already own a home, or are paying off a mortgage.

Catherine Cashmore



The political narrative on housing – Woe unto the one who suggests prices may fall..

A political paradox – Woe unto the one who suggests prices may fall..

Housing affordability has been the name of the game this week.  We’re coming up to a general election and ‘lo and behold,’ much to the distaste of those who deny Australia has a housing affordability crisis – and first home buyers are just being spoilt and picky – research by ‘Auspoll’ has revealed that 84 per cent of Australian’s put housing affordability top of the charts when rating election issues by areas of importance.

The article which appeared last week across various ‘News Corp’ publications, focused on key electorates in which ‘housing affordability’ came streets ahead of other hot topics such as ‘education’ or ‘border control’ – accompanied with case studies where 50 per cent or more of family income is going towards mortgage or rental payments alone.

Cited within the report was a 2007 comment by the then Opposition leader Kevin Rudd, who in an attempt to boost his popular vote, told former Prime Minister John Howard that;

“housing affordability is the barbecue stopper right across Australia.”  

It’s interesting to chart the political narrative regarding housing matters – because after years of lousy half hearted initiatives, which have done nothing to markedly advantage the two most venerable demographics of our market – principally first home buyers and renters – we have no sustainable interventions in place to affordably accommodate a rapidly expanding population, all of whom will need some form of shelter.

And whilst Australia has sailed the ship of good fortune, sheltered within a resource rich environment, and most families have adjusted their lifestyles to suit their income and as such, never feel particularly ‘well off’ even when earning substantially more than the median income – for those working at, or falling below the median, the cost of accommodation is an increasing drain on the economy and well being of our society, resulting in areas of socio-economic advantage and disadvantage in an English-style cultural or class divide.

Since 1974 during which Gough Whitlam aroused passions in his ‘It’s Time’ speech by pointing out: “The land is the basic property of the Australian people. It is the people’s land, and we will fight for the right of all Australian people to have access to it” political advocates from both sides of the playing field have weighed into the debate.

Policies such as the NRAS, the first home buyer’s savers account, and spruiked initiatives to increase infrastructure have all failed to make significant or sustainable inroads to either supply based concerns, vacancy rates, or first home buyer percentages.

A few decades on, and it seems whilst everyone wants to be popular and ensure housing is ‘affordable,’ – years of easy capital gains and tapping into the housing equity ATM machine, have made any contemplation that prices should drop – or even stabilise for a lengthy period of time – downright out of the question.

Or as John Howard worded it during prime minister’s question time approaching the end of our 2007 housing boom;

“A true housing crisis in this country is when there is a sustained fall in the value of our homes and in house prices”

And perhaps it’s worth mentioning that Howard’s response was in reply to a question challenging the plight of first home buyers from soon to be elected Kevin Rudd – who upon taking office – less than 12 months later – promptly inflated the market three fold with his first home buyers ‘boost,’ which bore the consequence of leaving our most inexperienced buying demographic in subsequent negative equity once it was stripped away.

Earlier this year, the question of housing affordability once again raised its political head, however this time it was in the form of ‘point-scoring.’

In a television program back in May, Joe Hockey made the call that house prices in Canberra would lose capital value under a Coalition Government.

“There is a golden rule for real estate in Canberra – you buy Liberal and you sell Labor,” Said Hockey.

The response from Kevin Rudd – the ‘then’ former PM – who ‘championed’ the cause of first home buyers with his ‘vendor boost’ as Professor Keen aptly named it, was;

“Can I just say, Joe, I’m not sure that will go down well with all the voters in Canberra,”

Labor politician Andrew Leigh who represents the Canberra seat of Fraser was not slow to weigh in on the debate;

”When the Liberals came to office in 1996, they wiped $25,000 off the price of a Canberra home….Today, Joe Hockey proudly jokes about how he’ll do it the same again”

A comment that was promptly disputed by ACT Liberal Senate candidate Zed Seselja, who – whilst paddling frantically against any suggestion that prices might drop under a Liberal Government, cited the ‘moving annual median house price’ from the Real Estate Institute of Australia with the comment

‘‘Prices dropped more in last two years of the Keating Government than they did under Howard’s first 1.5 years, and to its lowest point,’’

As I said, – woe unto any politician who suggests market prices may actually fall.  Far better it seems to burden buyers with cheap credit by way of grants, low interest rates and incentives, in a vain effort to mask rising costs under the false premise that residential real estate is getting ever more affordable – particularly in light of a construction industry that’s struggling to make any headway.

In 2007 in a report Entitled New directions in affordable housing: Addressing the decline in housing affordability for Australian families: executive summary (hat tip @bullionbarron) which contains quite a broad analysis on various actions that can be employed to ease the strain on first home buyers and renters – once again the paradox of protecting the capital value of property whilst still aiding affordability is underlined;

“Improving housing affordability does not mean reducing the value of existing homes, which are usually the primary asset of any individual or family.”

As for the policy of Negative Gearing, which was introduced and subsequently advocated to assist the lowly renter and reputedly ease the burden on social housing, (waiting lists of which are increasing) – the very same policy which property commentator Margaret Lomas suggested to ‘Property Observer’ would make “600,000 individuals homeless” if scrapped – coupled with the CGT discount of 50 per cent introduced by John Howard in 1999, which resulted in a 30 per cent increase in investment activity alone. It’s been by far and away the best incentive for the individual investor, fuelling speculation into the real estate sector and consequently creating a massive bubble of undiversified private debt.

And whilst I am not against investment into the residential real estate market, it makes little sense extensively encouraging it from a policy perspective if it doesn’t achieve;

1)      An improvement in housing affordability and supply;

2)      An increase in vacancy rates;

3)      A substantial boost to new housing and consequently infrastructure in ‘growth’ suburbs; and

4)      Lower rents for the most venerable in our society

All of which negative gearing has failed to do.

As I pointed out in my column last week – whist it would be unfair to condemn individual investors for taking advantage of various tax incentives in an effort to secure their financial future, any Government that puts in place policies to fuel speculation and subsequently inflate prices in a vehicle that suffers from inelastic demand side levers, yet is essential to the development of both individual and community culture –  is a Government creating a difficult paradox as to how to advantage those who entered at the beginning of the lending boom – (during which capital price to income was lower) – compared to those who find themselves at the sticky end of housing’s historical journey in which mortgage debt has inflated fourfold.

Now we have a situation where household debt to income sits close to 150 per cent with ‘Moody’s Analytics’ in a paper entitled “Trends in Australian consumer lending demonstrating how Australian banks have the highest exposure to residential mortgages in the world.

It was years of dizzy speculation into the established real estate market which resulted in prices escalating to their current heights, with banks only too eager to create credit through the extension of mortgage lending which in the ten years to the GFC, increased in-excess of 450 per cent.

And despite the innocent impression some try to imprint suggesting we have a stable and responsible banking sector.  Global measures to date, which aim to ensure a similar GFC crisis does not occur again, do not go far enough in ensuring financial institutions fund their investments with substantially more equity than current regulations dictate.

As Moody’s Analytics managing director Tony Hughes and senior economist Daniel Melser suggest;

“Irrespective of the complacency of local analysts, who sound a lot like many US housing cheerleaders circa 2006, this exposure (to home loans) represents a major concentration risk for banks and the Aussie economy,” comments not to be taken lightly.

The influence of investment into the property sector was noted as far back as 2003 in a Productivity Commission Inquiry on First Home Ownership submitted by the RBA.

The study concerned itself with the effect of “strong and rising house prices which were burdening new home owners.” And noted

“The most sensible area to look for moderation of demand is among investors.”.. “In particular, the following areas appear worthy of further study by the Productivity Commission”

The report noted some key investor incentives which in light of the comments above, could be moderated

1.)            “The ability to negatively gear an investment property when there is little prospect of the property being cash-flow positive for many years;”

2.)            “The benefit that investors receive by virtue of the fact that when property depreciation allowances are ‘clawed back’ through the capital gains tax, the rate of tax is lower than the rate that applied when depreciation was allowed in the first place.”

3.)            “The general treatment of property depreciation, including the ability to claim depreciation on loss-making investments.”

This was 10 years ago – and without putting too blunter note on it – we’re no further forward.

In addition – for those who continually suggest house prices are as high as they are simply because we have a ’shortage’ of accommodation, the same report highlights;

“At the macro level there is not much evidence to suggest that the growth in house prices has been due to a persistent shortage of supply of houses relative to underlying demand for new housing”

There are plenty of initiatives which can be employed to ease affordability – albeit an active attempt to gradually ease investor demand in our established housing sector, whilst facilitating the construction sector, should be one of priority.

A few days ago I read an interesting blog by R P Data investigating why the current upward cycle may be different and more tapered to the last.

The comment was made that first home buyers ‘tend to push prices higher…. because their behavior can be more emotional than other segments of the market’ whilst investors are ‘more clinical’ when acquiring real estate.

It may seem a sensible assumption to conclude, however as is often the case when assessing behavioral economics, the reality can sit some distance away from the broadly held perception.

There has without doubt been a push in home prices from first time buyers in periods during which easy credit has been offered on a plate by way of incentives and grants to the inexperienced proportion of our buying market.

However, without these dynamics, investors play (and have played) a far bigger contribution to price rises in Australia’s real estate market – and from my own anecdotal experience, seeing an investor pay over and above what a property is worth, (based on an educated assessment of recent comparable data,) is a work related Saturday pastime.

As it stands, compared to last year, all states are experiencing an investor lead boom. Victoria’s numbers are up 11.3 per cent, Queensland 4.3 per cent, South Australia 8.3 per cent, Tasmania a more modest 1.5 per cent, ACT is up 11.1 per cent, the Northern Territory up 28.5 per cent with the outright winner, Sydney up 35 per cent.

You don’t have to be Einstein to work out where all this is heading.

Catherine Cashmore