Residex responds (Updated)

Yesterday I posted on what seemed to be a very large turn around in sentiment from John Edwards the CEO of Residex. I also noted that there were some discrepancies between his claimed length of tenure in two of his own articles, and I also thought Mr Edwards was doing a bit of his own jawboning of the RBA in order to support the housing market under the guise of a forecast. To his credit Mr Edwards has provided a rebuttal to these comments on that post. 

So that his words don’t get lost down the bottom of an old post I thought I would re-post them here. I think his responses give a pretty clear indication of the current state of the housing market  ( in a broad sense )  from someone inside the industry and are certainly valuable to housing investors and potential owner occupiers alike. I am not sure if you are likely to receive a response to any questions you pose directly to Mr Edwards in the comments, but Residex is obviously reading so there is no harm in trying. 

Mr Edwards also appeared on Channel 7’s “Today tonight” this evening in what seems to be a ridicously bearish take on the market, but that is obviously not Mr Edwards fault.

I see some of you disagree with what I have recently written and what I have said in the past and I’d like to take this opportunity to respond and answer what has been said. I will do this in point form. 

 1. In two separate articles I said to have “more than 21 years” of experience and “more than 25″ years of experience. Neither is incorrect; let me explain why. I have in fact been assessing and working in the real estate information market for around 27 years. My company, Residex, is 21 years old and I am the founder. Previous to Residex, I worked with the National Australia Bank as a senior manager in the Corporate Banking area, responsible for structuring large financings of many types of assets. In my later years with NAB, I was involved in housing related product ($100′s of millions). In fact, I was responsible for what could have probably been the only CPI to Housing Growth Swap done in Australia and to do that, I had to understand the way the housing market performed. 

 2. I did not name RP Data Rismark in any of my writing. However, let me say that seasonality in a very well constructed capital growth index is difficult to find; the way it should be. Frankly, we don’t seasonally adjust figures because we can’t find much seasonality. There are seasonal factors in sales. Seasonality adjustments are usually made because of compositional changes occurring at different times of the year and the index technology is not good enough to pick up the compositional changes. 

 3. Did I change my attitude over the last quarter? Yes, I did and I don’t apologies for doing this. Instead, I have reported what has actually happened and what is happening, rather than try to defend my original statements. Why did my attitude change? Let me provide some Australia wide housing data: 

 Date Change in Aus HPI 

 30/11/2010 0.35%
31/12/2010 -1.10%
31/01/2011 -1.12%
28/02/2011 0.92%
31/03/2011 -0.35%
30/04/2011 0.44%
31/05/2011 -0.38%
30/06/2011 -0.89%  

As you can see, there were significant adjustments in both December and January, then in February the market appeared to stabilize and in March it reverted to a slightly negative number. At the time of writing the March data newsletter (which was in April) I had access to what was happening and it all looked to be going in the right direction, hence my upbeat comment coming from a prior concern I was feeling. In these circumstances, my reaction to the negative news that came from a particular party was natural. The last thing I wanted to see was something that would, or could, send the market back into adjustment due to negative press that diminished consumer confidence. 

I very much do not want to see our housing markets correct significantly as consumer sentiment is based on the consumers perception of their personal wealth position and environment. I want a carbon tax or energy tax but do not believe it is the right time for it to be introduced, particularly when we are going through a period of reallocation of the workforce to the resource sector. This is occurring at a time when international issues are looking more difficult also. I do want to see a reduction in interest rates of 0.25 per cent sooner rater than later; I don’t want to have the markets excessively stimulated as housing is already too unaffordable. I do want consumer sentiment improved so our markets remain stable. Remember, poor consumer confidence has flow-on effects. Poor retail sales ultimately lead to job losses which translates into increasing unemployment which translates into mortgage defaults etc. I would prefer it if there was no debate about the carbon tax at this time. Uncertainty at this time results in reduced consumer sentiment. I think a 0.25 per cent reduction in the cash rate (provided it is passed on by the big banks) might be sufficient to allow consumer sentiment to recover a little. This may help hold housing values until we all see the benefits from the resource sector growth flowing through all areas of the economy. I am sure we all recognise what will happen if housing values do adjust too strongly. 

Yes, going public on my concerns could have the capacity to further impact (badly) on consumer sentiment. However, sometimes risks need to be taken for the good of long term outcomes. Wouldn’t it be good if we did have a small interest rate decrease and the carbon tax debate ceased to exist at this point in time?!!! 

DE here with a couple of comments. 

I think Mr Edwards comments are quite reasonable for a person in his position and his data is obviously very useful. I also have to applaud him for changing his stance when the data suggested he should. I do however take a bit of issue with the following statement for 2 reasons.   

In these circumstances, my reaction to the negative news that came from a particular party was natural. The last thing I wanted to see was something that would, or could, send the market back into adjustment due to negative press that diminished consumer confidence. I very much do not want to see our housing markets correct significantly as consumer sentiment is based on the consumers perception of their personal wealth position and environment   

Reason 1. Although I agree with the statement I disagree with the context. We are not currently seeing “significant” changes in the housing market. We have seen a small correction in prices as the RBA juggles interest rates because it believes it needs to suppress consumers in order to lower inflation caused by the sharp rise in mining investment and associated flow-on effects to incomes.

This is something I expect to continue, but it must be remembered that these adjustments come after years of double digit growth which I consider just as dangerous as large price falls. It is not the RBA’s job to maintain house prices, its job is to maintain economic stability via monetary policy and it has been very clear about its inflation targeting mandate. The RBA is setting interest rates at a level it believes will restrict the consumer in order to control inflation and also to make sure that increased incomes are being used to pay down debt. In doing so it is attempting to re-balance the economy away from debt driven consumerism toward investment driven growth. Although this may seem painful, as long as the transition is managed correctly we should all be applauding this because it means that our economy will be far more sustainable in the long term. It does however not bode well for people counting on capital growth in housing to maintain their lifestyle. 

Reason 2. There is a significant and growing proportion of people in the community that rising house prices have a negative effect on. So although I support the premise that sharp falls in house prices would be detrimental to the economy, I cannot support the idea that slow downward adjustments in house prices (accompanied by falls in associated debt) would not be advantageous to many people and the broader economy. Housing is not just about economics. This is a subject I have covered previously.

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  1. DE – the reality is that housing bubbles are an economic cancer.

    For Mr Richards to “hope” that current bubble prices stay elevated and households are forced to take on grossly excessive mortgage debt, to assist in keeping them propped up. is extraordinary to say the least.

    He might like to tell us which bubbles historically have stayed inflated.

    And further to this, what the consequences are when they do deflate.

  2. The_Mainlander

    Nice, good work DE one of the greatest things about MacroBusiness is that it works really hard to be objective.

    Well from what I have see since your launch.

    Giving John a fair and equal chance to explain his position is excellent.

    And some good points to be fair.

    Also, we all change our opinions over time – even Bears (though 6 years in I am still a Perma-Bear) that said I think it is important we have a quality debate.

    Great post John and DE.

    Thank you, TM.


    • First Home buyer

      Exactly. I don’t think anyone should be chastised for changing their opinion in the light of new data (except politicians who should never “backflip”).

      I wonder how long it will take for the other to come to the party.

    • Agreed. The quality of this site (from day 1 I might add), along with the willingness of the bloggers to listen and give an open and fair forum to all is invaluable and even rare.

      Many thanks to both DE and JE for their insight and thoughts.

      Once again, another outstanding weekend read from the MB team.

  3. Facepalm.

    Nothing but derision for the BUS DRIVER dropping his 10% deposit on the $1.56 MILLION DOLLAR white elephant.


    //Gosh that feels better!
    ///TT has its intended effect

    • Ditto. I couldn’t believe what I was watching. The dopey Asian lady wasn’t far behind. This stupidity needs to be punished and reported. What are the banks doing giving them those kinds of loans?!

      • To be fair to the banks I don’t think the bus driver & asian lady had been given loans. I’m guessing they had paid the deposit only and expected to get finance when the project was completed.

        When time came to get finance the banks have probably were not even slightly interested due to LVR & valuation not getting them anywhere near the required loan amount.

        So it’s the buyers themselves at fault no doubt helped along into financial ruin by a liberal salting of spruikers.

  4. Couldn’t today tonight have picked some more genuine examples of people hard done by. The people they used are halfwits. What they did was no different to putting it all on the horses. Gambling pure and simple.

    Love how the media can shape the punters attitudes. A couple of years ago they were showing all these geniuses who were buying anything that moved (as little money down as possible). They put them up as property rockstars. Property was seen as a no brainer

    Now these poor mugs are going to have trouble sleeping at night. These type of horror stories will be standard fare for the tabloid media.

  5. Quite agree with HousingTroll and a few others. I have nothing but contempt for the two halfwits. Am I supposed to feel sorry for speculators? These are times to rejoice not to mourn. Is quite simple you don’t really have to be an quantum mechanic scientist. When most of your income goes in mortgage repayment there is no money left for other things. So I buy less food, look into the old clothes bag and start wearing things I thought I should have thrown out five years ago, I stop going to the restaurant, going to the movies, car is old but is still going and although planned I’m not buying a new one… I’m getting quite boring but the list goes on and on. So what did the stupid government thought is going to accomplish propping the housing bubble? Is just bringing the rest of so called economy to a stand still. We may live in 2 million dollars property we bought for 2 hundred thousand 20 years ago but is that of any good to anyone? Unless I sell and move to Somalia. Which most of the people even Somalian-Australian won’t do. Can anyone tell me why is this place full of speculators and a government condoning it called “The lucky country”?

    • My thoughts exactly.

      What Mr Edwards fails to recognise is that lower house prices will increase disposable income which can be injected into the economy (i.e. cash flow that would otherwise be used to fund overpriced housing).

      “I very much do not want to see our housing markets correct significantly as consumer sentiment is based on the consumers perception of their personal wealth position and environment.”

      In relation to the above comment:
      a. Not all Australians are home owners.
      b. We should be careful not to support an economy that is undermined by consumers using their overpriced homes as ATMs.

    • The Lucky Country

      With an introduction by Hugh Mackay

      ‘Australia is a lucky country, run mainly by second-rate people who share its luck.’

      The phrase ‘the lucky country’ has become part of our lexicon; it’s forever being invoked in debates about the Australian way of life, but is all too often misused by those blind to Horne’s irony.

      When it was first published in 1964 The Lucky Country caused a sensation. Horne took Australian society to task for its philistinism, provincialism and dependence. The book was a wake-up call to an unimaginative nation, an indictment of a country mired in mediocrity and manacled to its past. Although it’s a study of the confident Australia of the 1960s, the book still remains illuminating and insightful decades later. The Lucky Country is valuable not only as a source of continuing truths and revealing snapshots of the past, but above all as a key to understanding the anxieties and discontents of Australian society today.

  6. Linking the state of the Aussie housing market and the Carbon tax is ridiculous. I perfectly understand the downward pressure the tax will put on some parts of the economy, but then a large number of households will be compensated accordingly.

    In actual fact if the carbon tax did negatively affect household finances, then interest rates would probably be cut – so mortgage holders would be better off than non-mortgage holders.

    You’ve just got to think things through a bit more, unless it is just about putting the blame/guilt on the government for falling house prices, and therefore pressure to use fiscal stimulus to “fix” things. Unfortunately it seems the government policy is to a) get the budget back to surplus, and b) implement a carbon tax.

    The downward pressure on property prices is great. Not sure there’ll be too much to keep it propped up up unless these sovereign debt crises magically sort themselves.

    • MissMoneyPenny

      I totally agree. If people blame the carbon tax for their house prices dropping they have no idea how the economy works. John Edwards should know better too….

    • AxeIF: “Linking .. housing market and the Carbon tax is ridiculous”
      Agree. Housing is unaffordable because banks overlent and every govt policy area encouraged land inflation.
      To start with, expecting RBA to contain prices rises while Treasury sanctions speculative behaviour (negative gearing and Interest-only Loans for 2nd hand homes and CGT discount etc) is unrealistic.
      Re carbon tax, for alternate view try ‘Environmental enslavement for middle-class comforts’:
      Best comment by GC (@ 11:53)

  7. I just watched that Today Tonight video.


    Firstly, what are bus drivers and suburban manicurists doing buying $1.5m investment properties off the plan? And wtf were banks doing lending to them on 10% deposit?

    It’s heartbreaking.

    Secondly, I have been puzzled for a while at why Brisbane and especially Perth are among the biggest fallers. Has MB looked at this already?

    Thirdly – lol at the bloke saying Gladstone is “a no-brainer”!!
    Yes, building an LNG plant (or four) takes a lot of people.
    Running one takes far fewer. Are all those people going to stay in Gladstone?

  8. Thanks for clarifying your position here Residex John. You seem to be suggesting the market is suffering from interest rates, which remain at below historic averages despite a supposed ‘140 year boom’, consumer sentiment and the carbon tax. Where has the supply argument gone?

    Is there any chance we might get someone from the real estate sector to actually admit their role in the coercion and deception of the public by the repeated fear campaign of missing out due to mass shortages? The banks were no better with their actions, but I believe the real estate industry has much to answer for. Hopefully the regulators might take a look at future licensing and better controls on data. I won’t hold my breath.

    That TT story rings many unfortunate bells from the USA circa 2008/9. I remember Karl Denninger asking questions in that case about how hairdressers could possibly have been given $400K+ mortgages at the height of the bubble there. That might be chickenfeed compared to the sums involved in this story.

    What I find irritating is the cockroach like behaviour of all the former real estate stars. They all blame everone else and flee as soon as the lights get switched on. Hopefully that TT story might have flicked the switch for many who were about to join the high debt, home ownership camp. They may now realise that the root of many of our societal and economic problems is this anchor attached around the ankle of many otherwise productive families.

  9. @KM

    Why are Perth & Brisbane falling so much!

    The plain simple truth is because the price was unaffordable. The price will keep falling until it becomes affordable.

    Affordable is not a bank lending officer, mortgage broker, bank economist, or a ‘CJ’ definition, it’s a personal/family truthfull assesment of what payments for shelter individuals are willing to make as part of an honest individual household budget including individual discretionary spending and individual lifestyle choices.

    When the price stops rising into severly unaffordable teritory for several years, large numbers of households wake up to the fact that the unaffordability game of refinancing to pay the bills and negative ammortisation i.e. the housing equity ATM runs dry of cash. Then people have to sell because the payments are unaffordable.

  10. I agree DE – “I cannot support the idea that slow downward adjustments in house prices (accompanied by falls in associated debt) would not be advantageous to many people and the broader economy.”

    But I would have said:

    I support the idea that slow downward adjustments in house prices (accompanied by falls in associated debt) would be advantageous to many people and the broader economy.

    ; )

  11. p.s I wasnt being pedantic, I was suggesting that it is importanbt to be affirmative in this statement, as its the truth that will destroy the political cover for proping up house prices

  12. @Peter W –

    My question was why are Perth and Brisbane the *biggest* fallers.

    I suspect there’s a simple answer – maybe it’s just because they’ve risen much faster in the past few years – but given that these two cities are closest to sites of the resources boom, I don’t understand why they are falling fastest.

    Sydney is pretty damn unaffordable, and yet prices here are apparently more resilient (to my chagrin) than Perth or Brisbane.

    • I think the resource boom has fed into price rises in QLD and WA, but it also led to increased building. SO there are plenty of homes. Although there is no doubt a need for rental accomodation in these areas for the miners, they dont always stick around for too long and I think we are seeking a significant amount of overbuild in some areas.

      This is also going to occur in Melbourne, as has been pointed out on MB many a time.

      I thik Canberra could suffer a similar fate if Tony gets in and sheds some fat around the public service.

      With Sydney, I think its just that a lot of the financial types got a boost from the 09 Rudd-flation + Sydney does seem to have genuine supply side issues due to having the worst State GOvernment for how ever many years!

      As the economy tanks, and the crash goes national – Sydney wont avoid substantial falls…because as you say, Sydney is bloody unaffordable

    • I think a lot of people in Perth do not work in mining and are struggling. It is the double-speed economy thing. Possibly because people who are doing quite well and do work in mining have huge mortgages and are not really stimulating the rest of the Perth economy because most of their household income is going into servicing their mortgages.