As we recorded at the time, it was two months ago that Residex CEO, John Edwards, had the following to say on the falls in Australian house prices:
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.
It’s too tedious to recall further, but Mr Edwards went on to castigate R.P.Data Rismark, his competitor, for making the falls appear worse they are.
In the last few days, however, Mr Edwards, has had a revelation:
I have been studying the housing markets for more than 25 years and have probably looked at more models on the residential property market than anyone else in Australia (other than my chief statistician). Yes, you may claim that I have passed my used-by date, but this time and experience has brought about a wisdom that is very difficult to learn or teach.
I can tell you that in the whole time I have been studying the market I have not seen the makings of such a perfect storm. The June quarter numbers in some states are the worst recorded for more than 30 years (you would probably have to go back to the 1960s to find worse).
The market right now is very patchy. There are bright stars on the horizon but they could be dimmed very easily as their glow is weak and flickering, like any new flame is in its infancy. Our star is Sydney, which is the market that generally points to the future performance of other markets across Australia, and the worst performing capital city, Brisbane, is in trend terms indicating that the worst of its corrections are probably over…
Leading into the global financial crisis, I called the potential for a 1 in a 100 year event when all markets in Australia were correcting. The event was averted as the Reserve Bank held back on making an interest rate increase, then later made some dramatic interest rate reductions. Today, all markets are not correcting but some have done very poorly. Poor management of our economy at this point in time could easily bring about that 1 in a 100 year event that was previously avoided…
So, in two months, we’ve gone from “nothing to see here” to being on the verge of a one in a hundred year event, and the tenure of Mr Edwards expertise seems to be growing along with his bearishness.
I’m not saying house prices aren’t falling. Of course they are. The latest credit aggregates (from May) signal that, especially in places such as my own state, Queensland. The Unconventional Economist has argued, leading the nation, Melbourne looks especially vulnerable, just as Edwards says:
…when we look at the supply of stock of properties in Victoria it is clear that this market could have a considerable amount of adjustment in it. Our numbers indicate that Victoria could have a significant stock surplus of something in the order of 24,000 dwellings, mainly in the medium density market. The net outcome, without careful economic management, could see reductions in value in this market that are considerable higher than those recently seen in Brisbane (where there is more than likely no shortage of stock). Overall I view the Melbourne market as our most at risk market at this time…
However, Mr Edwards dramatic volte face looks more like jawboning rate cuts to get the party going again than it does a forecast:
Late last year I suggested the next interest rate movement would be down and reiterated this just before Easter as it became clear that consumer confidence was turning down and our housing markets started to produced some negative numbers. I remain of this view and think that a rate cut will be sooner rather than later – I expect this to take place in September, however if the carbon dioxide tax does not come to pass then I predict the rate cut will be later.
And yesterday he succeeded in his quest to go national.
Meanwhile, another of our old bullish friends, Monique Sasson Wakelin, produced a revealing piece for Eureka Report:
Putting aside forecasts about the ultimate direction of the market, one of the unintended consequences of these predictions of a moribund property market is that it assists the case of those who promote positively geared or positive cash flow properties.
… It is clear from a review of the media over recent months that the case for positive cash flow property investment is being increasingly promoted by proponents of high-yielding property schemes with a vested interest in selling their product.
Be careful about the logic of this sales patter! It positions these high-rental-yield, low-capital-growth properties in a manner analogous to safe and boring bank deposits in a time of turmoil.
… Cash flow positive properties underperform in a softening market for two reasons. First, high-yielding properties are disproportionately bought by people with fewer funds to invest compared to investment-grade property buyers. Consequently, they tend to buy cheaper property in outer lying areas because of the lower price tag and are less likely to obtain professional advice. These assets, and therefore their owners, are less able to withstand a downturn in the economy, so are more vulnerable when it happens.
Secondly, high-yield properties tend to be in areas with less diverse and secure economic prospects so provide a pool of tenants that are also vulnerable in tough times. The result is that positive cash flow properties generally suffer far greater capital losses in the downward part of the property cycle and experience a greater turnover of tenants.
…If you see a property marketed with a high yield – at or over 5% – don’t buy it. It’s a dog when the market is doing well, and it’s a dog when the market is soft!
Ms Wakelin is, in my opinion, correct. Buying an expensive property does tend to serve you better because it’s in an area of high demand. However, the argument here also exposes the total perversion of the Australian property market.
If 5% is considered high yield, and it is, then it is quite obvious that property has zero appeal as a yield play. After costs, that yield is cut again, probably by half. With 6.5% available in the bank, why would you bother?
Ms Wakelin has exposed the fact that the ONLY reason to buy property is capital gain. And, as we know, such markets tend to be unstable. They are either rising as they excite speculation, or they are falling as losses mount and folks run for the exits.
What a perverse way to frame the families’ largest asset. Perhaps Mr Edwards is not so wrong.