Last week I posted about Louis Christopher’s latest appearance on Channel 7’s breakfast show in which he appeared to take a bullish position on the house market. This may have come as a bit of a surprise to many housing market watchers given that he appeared on the same show just 9 days prior with a far more bearish take on the market.
However , given that one of my major complaints with many housing market commentators is that they refuse to adjust their script no matter what the new evidence presents itself , I do have to support Louis in his evidence based approach to market analysis even if I don’t totally agree with his latest assessment.
In his company’s latest newsletter Mr Christopher provides some additional analysis to back up his current position on the market.
“Last week we detailed publicly a relatively bullish scenario regarding dwelling prices – assuming lower interest rates and Europe muddling through without a large scale default event. We reported these forecasts within this newsletter, within the Daily Telegraph and on Seven’s Sunrise.
And we hold to this as our base case scenario.
House prices will likely rise in 2012 if there isn’t a credit squeeze in this country. This scenario is not a new one. In fact, we highlighted it in our Boom and Bust Report which we released back in September.
From our regression modelling it appears that the market is very sensitive to interest rate changes. We have had this conviction concerning the markets from some time now. Yes, even a quarter point change can move the markets and this is because buyers and owners are highly leveraged. Now that we have had a half point change which has been passed on in full, there is a greater chance (in our opinion) that dwelling prices will rise.
Yes, Europe is the key. The risk is clear and present. If Europe allows for large scale banking defaults and a general credit squeeze, this will see our banks ration housing credit by requiring more conservative loan to value ratios. Of course, if the squeeze is large enough, banks could come up with additional ways to reduce their balance sheets. At its worst this literally could include calling loans simply because the loan-to-value ratios have risen too high due to drops in property prices. No doubt an event of the last resort with the bankers knowing full well that such a move could very well trigger very deep house price falls in this country, which would further destabilise their own balance sheets.
For what it is worth, I still think the European Central Bank (ECB) will be forced to print money. Not that printing money is a real solution, but it will buy them some time. Going into a deliberate austerity strategy is very likely to cause mass defaults and a depression. And from what I can see, it’s not in Europe’s interest for a depression to happen.
In any case, it looks like the answers may be upon us sooner than we think.
Housing Finance Approvals
Please find below the latest housing finance approval numbers. Of course, the data excludes refinancing in order to understand what ‘pure’ demand is doing. As we can see, we have had yet another month of rising approvals. And all this is taken before the rate cuts. Though as noted below, there has not been a lift yet from the clearance rates. Perhaps this is masked by seasonality?
The red dot on the chart is the point where housing finance approvals need to get to in order to attain capital growth equating to inflation and naturally, meet our bullish scenario forecast for 2012. So clearly, we are not there yet and we will need to reach the red dot by June next year in order for our bullish scenario to play out.
Still, I disagree with the notion presented that there is no current recovery occurring in finance approvals. Sure, when considering housing finance approvals based on lending values, there has been no recovery. However looking at values on their own does not take into consideration a scenario where demand is suddenly increasing again yet values record a fall simply because the new buyers are taking out sellers at their lower asking prices, thereby driving the median sold price downwards first, before it rises. Remember, sellers are always the last to fathom turning points in the market, whether upwards or downwards.
We had this situation in the March quarter of 2009, whereby there was a sudden increase in demand and that demand was taking out discounted asking prices on mass, thus dropping the median first for that quarter, then driving it up for the rest of the year. And I think we are going to have the same situation again. I am reasonably certain that the ABS will record falls in house prices for the December 2011 quarter as well as the March 2012 quarter. Like 2009 (but with less energy), that March (2012) quarter will really be all about sellers being taken out at the bottom, with the June quarter recording a rise. Once gain though, the big caveat here is Europe, as discussed above.
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I obviously agree that Europe is a key and his analysis if fair enough, but possibly a little bit too optimistic in my opinion. It would also appear Louis has been Macrobated. However, there is another side to the “credit crunch” narrative that I believe he has overlooked. Even in the situation that Europe does muddle through, and the ECB does enter into some sort of “printing” operation, I find it hard to envisage a scenario where this is going to create such a risk-on event that our banks are going to be in a position to support lending that would provide “up to 7%” growth in the next 12 months.
The world is not the same place that it was in 2008. The rating agencies have already signalled they are watching the Australian banking system for changes in its dependency on wholesale funding even with the explicit guarantee of the government’s balance sheet. The banks have been able to stabilise that position over the last year, but only because of the subdued lending environment. Any new breakout in lending of the kind required to push the housing market toward inflation positive growth is undoubtedly going to require a re-adjustment in the financing portfolio of the banks. With the Australian government slipping further away from surplus by the day, I am doubtful the rating agencies are going to let that slip by. Obviously there are some dependencies between the government’s balance sheet and private sector credit issuance, but in the current global environment, even with a turnaround in Europe, Australian banks will still be under pressure.
Then there’s the longer term questions. Even if some recovery is possible next year, does it matter? How long can such overvaluation be sustained in a debt hostile world, with Australia completely dependent on bubble level commodity prices and the great demographic shift of the baby boomer retirement at our doorstep?
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Having said these things, I think Louis’s analysis is balanced, researched, evidence based and certainly possible. He does provide a counter-weight to the vested interest drivel from some others in the industry. Evidence for that is his newsletter’s focus on bogus auction clearance rates:
APM Auction Clearance Rates
As mentioned a little while ago, we have been studying the differing auction clearance rates by numerous bodies. I thought I would post APM’s Sydney clearance rates below. There are three lines in the graph below. Firstly, the clearance rate reported on the day, which is the number mainly quoted in the papers the following day. The next line is APM’s revised clearance rate, reported one week later.
Finally, the third line contains our estimated clearance rate, taking into account all those unreported auctions that still go unreported one week later. We have assumed here that 85% of those unreported auctions are failed campaigns. We have come up with this number based on my own experience of unreported auctions during my time at APM itself. I distinctly remember that the number was fairly regular and that 90% of unreported auctions one week later were actually failed campaigns. But that is just my experience, which happened a little while back and so the assumption made there can certainly be challenged.
Sydney Auction Clearance Rates as Reported by APM and Estimated by SQM Research
So what do the results reveal?
We would argue that right now clearance rates in Sydney are below 50%, which is a signal that house prices are falling, albeit at a modest rate. It should be noted that at this time of year, clearance rates do tend to fall away, then lift at the start of the new season (February).
To be fair, the trends illustrated between the three clearance rate measurements are largely intact except for a few notable periods. One was at the beginning of the year when a 69.9% clearance rate was published for Sydney. That was revised down a week later by APM to 61.5% and SQM Research has it sitting at 59.3%. Another was in October when APM missed over 60% auction listings on the day. This can be perfectly illustrated in the chart below.
The Percentage of Unreported Sydney Auctions as Published by APM
Importantly, our estimate of the clearance rates generally fit with what house prices are doing. If one considers the auction clearance rates between 2000 and 2010, clearance rates in the 40’s would translate into flat to falling house prices. That was the case in 2000 and 2004. And now, clearance rates purportedly in the 50’s and 60’s equate to flat to falling house prices?
The final chart below just gives you an idea of the overall auction listings verses what has been reported to APM. In this case what is most revealing are the listing counts themselves. Firstly, they illustrates the seasonality in that one has fewer auctions during the winter months with both early Autumn and late Spring being the peak periods. Normally late Spring has the highest number of auction listings, but not this year. The count of auction listings themselves comes from APM. In 2012, SQM research will be providing seperate counts to the market on the number of auctions due.
To be fair, I strongly believe that the Auction reporting team at APM are doing the very best they can and I am aware that there are some still there from when I was running the auction operation. So I do not believe at all that auction clearance rates are being deliberately fudged by APM.
But that is not to say things can’t be improved. They can and one of the improvements that should happen is providing an estimate sales rate of the auctions that have been unreported or send out monitors to those agents who regularly boycott providing results.
I continually raise this as an issue firstly, because it is plain wrong of the industry to regularly publish and imply (whether deliberately or not) that selling your property by auction, even in a downturn will translate to success on the day in over 50% of cases. This is simply not true. And secondly, auction clearance rates are becoming an unreliable indicator of the state of residential real estate in picking up turning points in the market.”
