Bull fighting

Back when the housing market was booming everyone got their slice of the pie there were no losers so no one needed to argue any particular point or methodology. As long as the cash was flowing in from the banks and shadow banks offshore borrowing the system grew and it was all smiles. Investors and home owners didn’t care either, as long as the perceived wealth had an arrow pointing north no one really cared how the statistics were delivered.

The issue now is that those arrows are no longer pointing in the right direction, owner occupiers and investors are now on tenter hooks about what the market is doing and are therefore getting very nervous about the data. Without the support of rivers of gold it was only a matter of time before the in-fighting began between the data providers.

Over to John Edwards the CEO of Residex and his opinion of the opposition.

We’ve all heard the phrase ‘someone’s loss is someone else’s gain’. Quite a fitting statement for the situation we are presented with in the property market right now as good opportunities have come about over the past few weeks for investors, while sellers are losing out.

Misinformation, incorrect reporting or misunderstandings of what has been said has potentially caused a situation where for those of us who have bought in the market over the last month will probably make windfall profits while those who are selling will have not made the profits they should have; in fact some sellers will have lost money unnecessarily.

I have been researching the housing markets for more than 21 years and I am sensitive to ensuring we have a properly informed market. Because of this, I am concerned that the market understands when values are actually adjusting or are simply not performing as well as they normally do.

While it will always be difficult to prove, any result in a market is caused by a particular event. When there are many forces at work that affect a market, each of them can individually cause an adverse reaction. However, I believe that a reasonable person would come to the conclusion that the recent misleading information concerning the market has contributed to some level of the correction we are now seeing.

In the past few weeks there has been widespread press that Australia wide housing values fell by 2.1 per cent in the March quarter. The truth is they didn’t and the correction was in fact five times less than this. The party who led this view was making this statement because it was convinced that it should report housing growth performance on seasonally adjusted terms. My long experience tells me that this is inappropriate for a lot of reasons, which I will discuss further in this newsletter.

On this topic, I am not alone. Michael Sherris, Professor of Actuarial Studies at the Australian School of Business, and his research team are currently working with Residex on a number of different projects.

Professor Sherris said, “It is clear that there is seasonality in some housing markets but notwithstanding that, it is not reasonable to adjust growth numbers by a seasonal factor if the actual level and performance of the market is what is being measured.”

Most importantly, the ordinary Australian doesn’t understand statistics as analyst do and hence could be selling their most valuable asset, their home, under misconceived views that housing values are seriously correcting. As a consequence, these people were probably accepting a price for their home that was lower than it should have been.

Again, as a long term analyst, I know that the housing markets are important to each of us individually and to a very large number of businesses. Incorrect information will have cost us all, as our confidence was turned down and businesses failed to transact deals that would otherwise have been completed as the market reacted to an overly pessimistic view of what was happening.

So what happened? A well-known Australian research company within the industry reported that home values across Australia softened by -2.1 per cent (seasonally adjusted) over the March quarter (-0.4 per cent in raw terms). The raw number was the real result or close to it. (Residex, have reported that houses fell in value by 0.55 per cent for the quarter while units in fact increased in value by 0.65 per cent.)

It is not the fault of journalists who reported that house values fell by 2.1 per cent. In reading what was written, you could be forgiven for interpreting the large fall. However, what was really meant by what was said?

Over the long term, the usual growth rate in property in the March quarter is 1.7 per cent (as calculated by them) and during the March quarter just past, house values didn’t perform as well as they typically do, which is producing a growth rate of the 1.7 per cent. Values fell by 0.4 per cent, meaning they performed 2.1 per cent worse than they typically do on average in a March quarter – so no great fall, just worse than what is typically.

There are many questions that flow from the statements that were made such as does the organisation that made the statements have a dataset that is of sufficient duration and depth to allow them to make the assessment of what the typical March quarter growth rate is? Are seasonally adjusted house prices relevant in a housing market at all? Do the analysts adjust their numbers for mistakes the following quarter or month when they receive more data, and do they tell the market about the magnitude of the adjustments?

To me, the position is clear. The party’s reliable calculations on growth rates they release are for less than a decade. This will hinder its capacity to be able to say what a typical growth rate for a quarter is, unless the last decade was a typical market, which personally I don’t think it was.

In support of the un-named company, I must say that its use of a hedonic index is far superior to medians that are effected by changes in market composition, which is why I trust their data to give a more realistic view of what is actually happening in the market.

Now to the reply from said un-named company’s representative.

….. First, the Reserve Bank of Australia explicitly requested that Rismark and RP Data produce seasonally-adjusted index results precisely because it is a proven empirical fact (documented by both the RBA and ourselves) that Australian house price movements are highly seasonal, as they are elsewhere around the world. This is intuitively understood by the man on the street. The housing market effectively dies down over the summer months, and revitalises again during Easter and Spring. In the RBA’s Statement on Monetary Policy, the Bank seasonally-adjusts all the house price index data it reports from RP Data-Rismark, APM and the ABS. I would note that the second-tier data provider in question was dropped several years ago from the RBA’s publications.

Second, as most people know, the Australian Bureau of Statistics seasonally-adjusts most economic data that displays seasonal characteristics. This is standard statistical practice. In the US, all house price index data–from the well-known Case-Shiller indices to broader FHFA measures–are also seasonally-adjusted.

The importance of seasonal-adjustment can be demonstrated by this example. A couple of years ago, our index reported a negative result for the month of December after a run of strong outcomes. Taken at face value, this might have been indicative of a turning point. After all, house prices had fallen in raw terms. But, seasonally-adjusted, it turned out that the negative December number was actually very positive given that the market tends to cool significantly at this time of the year.

Third, as you can see from our monthly media release, RP Data and Rismark go to great lengths to report both the “raw” and “seasonally-adjusted” house price findings. This is because we believe there is value in both. For example, on a seasonally-adjusted basis, our first quarter numbers were down about 2%. However, in raw, or actual terms, they were only off circa 0.4%. What this tells us is that Q1 was very weak relative to what one would normally expect at this time of the year. Yet if you wanted to formally mark-to-market an investment portfolio, you would use the raw numbers, which while also soft were not as weak as their seasonally-adjusted counterparts.

As a final comment, another competing housing information provider criticised RP Data and Rismark on TV the other night for putting a purportedly positive spin on our data because of claimed conflicts (in RP Data’s case, the fact they service 70-80% of all real estate participants, and, in our case, the fact that we provide risk solutions that enable individuals or institutions to go long or short the market). While this was just a transparent attempt by the individual in question to advance his own commercial agenda, it is worthwhile highlighting two points.

1/ RP Data and Rismark’s house price forecasts have been extremely accurate, and substantially superior to the hyperbolic and empirically incorrect claims made by this competitor (eg, regularly predicting precipitous house price falls in order to attract media attention). Because RP Data and Rismark only thought that Australia’s housing market would suffer a modest correction during the GFC, critics argued we were bullish. Likewise, because our models accurately predicted the quick recovery, those who got things relentlessly wrong sought to find fault. Ironically, we have been amongst the most bearish analysts in the market since the start of last year, having once again correctly forecast the mid 2010 soft-landing, and the subsequent flat-lining in conditions; and

2/ RP Data and Rismark’s house price information is today regarded as demonstrably superior to any alternative supplier, and the explicitly preferred benchmark of the RBA, Treasury, the ASX and pretty much every economic analyst in Australia. Here is what a few of them have to say:

“RP Data-Rismark’s monthly estimates are more timely and reliable than the ABS’s quarterly readings” Rory Robertson, Westpac

“The RP Data-Rismark index has emerged as Australia’s authoritative source on home price trends.” Craig James, CommSec

“RP Data-Rismark are the RBA’s “preferred data analysts’ for house prices.” Bill Evans, Westpac

“RP Data-Rismark’s…analysis is first-rate and backed by one of the nation’s top research teams that focus exclusively on this area.” Paul Braddick, ANZ

“In our view, [RP Data-Rismark’s index] is conceptually the best of the house price series available, especially considering it is based upon transactions (not settlement date), is available for rural and city areas and appears to have better turning point characteristics than other house price series… “Tim Toohey, Goldman Sachs

So now it is a 3 way tussle.  Bring on the third party

House and apartment prices are falling in nearly every region across the country but in some they are falling faster than others. They are not ”flat”, or ”stabilising” or ”plateauing” or ”shifting to a new level of stability” or ”having a minor hiccup” or ”increasing in activity” – they are falling.

As a real estate analyst with 20 years’ investment experience I find it amusing that many industry commentators refuse to use the word ”falling” to describe decreases in property prices.

Why is that? Perhaps a better question still is: did any of these commentators predict 12 months ago that property prices would fall in 2011? Conduct an internet search and you will find some revealing answers. Sadly, most industry participants who publicly comment on the property market have an obvious potential conflict of interest in not disclosing negative market conditions because, ultimately, it is not good business to do so.

What many in the real estate industry do not understand is that, in the long term, it is actually in their interests to report market conditions accurately, since a transparent market improves investor confidence.

For those who prefer moving pictures check out a recent 7:30 report piece . The battle begins at 3:36.

Let the war begin !

Latest posts by __ADAM__ (see all)


    • other ways of saying ‘prices are falling’:
      RE is a dud investment ATM;
      RE doubles in price every 7 years – or used to;
      negative equity sucks, but i’ll get used to it;
      bigger fools please bail me out.

  1. Outsidetrader

    I don’t recall any complaints at the end of January when RP data’s report for the December quarter showed seasonally adjusted growth of 0.4%. With December supposedly the weakest quarter, I imagine the raw data would have shown a fall in value, but I don’t think anyone from Residex was eager to dispute the use of seasonally adjusted data that time around.
    I can’t be sure if prices fell during the December quarter in raw data terms, as RP data also convieniently decided to leave that information out of their media release (perhaps they only report the raw data in quarters where it makes the figures look better?)

  2. And our beloved Bullhawk wouldn’t link to the “…article written by the owner of a small (and notionally competing) housing data provider, which attempts to criticise RP Data and Rismark for reporting “seasonally-adjusted” house price index results.”

  3. Drederick Tatum

    From Joye: “Ironically, we have been amongst the most bearish analysts in the market since the start of last year…”

    Can someone explain to me why this guy wanted to bet Jeremy Grantham if he (Joye) was actually bearish last year?

    Is this a case of historical revisionism?

  4. Statistical error of quarterly data is far larger than seasonal adjustments so it really does not matter what agencies are publishing because their methodology does not have sufficient resolution to measure 1-2% up or down in a single quarter

    • John,

      It has always fascinated me how these blokes come out with:

      “House prices in … fell by 0.1% last quarter”

      With that sort of computing power, they should get out of housing data, and go into interstellar space exploration.

    • Drederick Tatum

      If they included statistical error they probably wouldn’t have a product to sell!

      Ditto these business surveys that come out each month.

  5. I think Chris Joye’s bet with Grantham was over a 3 year time horizon. The Rismark guys have been bearish on housing since late 2009/early 2010 because of their view on interest rates. Guessing Chris thinks housing is going to recovery in years 2 and 3 of the bet.

  6. The picture says it all, its all bull, property prices are going down, and will stay down for years, call it what you want, I say fair value, there will be a lot of statements by a lot of so called experts,listen to some of the ones on you tube before the states had there property bubble pop!
    Yes different in ways but not so different in results, over priced real estate lasts only so long, we were lucky here because of the resource boom and the first home owners buyers grant,reality check now, the goverment might help again but that will just give you a little more time..
    The public is on to it now, fear is around,and it will get worse fast, that’s my understanding of how real estate bubble’s works.

  7. I noticed Kochie had Louis Christopher on Sunrise this morning to discuss the “falling” property market. Apparently they’re doing a follow-up segment tomorrow as well.

  8. You ask, did anyone forecast price falls in 2011? Yes! As Propell Research Manager I published a paper in December (see our website for a copy) with a forecast of a 5% fall in 2011. I also agree that many seasonally adjusted series mislead in the current market and have written on this in my blog at propellresearch.wordpress.com agreeing with DE

    • The_Mainlander

      Think Steve Keen may have beaten you a bit earlier. 🙂

      Interesting to see just how right he is in the coming months!


      • Even more interesting to see will be if some of the personal, vindictive bile that has been thrown his way will be withdrawn.

        Somehow, I doubt it.

        • The_Mainlander

          Wouldn’t that be nice for those nastie pasties to retract those statements. Totally agree with you.

    • Sensationalistic nonsense. A ratings grab that we have seen all too often from Kochie, I won’t be watching the follow-up.

      Not saying property isn’t softening or falling, but this piece was dribble.