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.