Exclusive to MB, Tim Lawless, CoreLogic Head of Research, responds to questions about the RBA sidelining its house price results in making recent decisions on monetary policy.
MB: What did CoreLogic change in its methodology and why?
Tim Lawless: The CoreLogic hedonic model hasn’t changed, but changes were made to sampling method that trims outliers from the data. The improved treatment of extremely high and low transactions will provide a more precise measurement of housing market conditions going forward and reduce volatility. When the improved filter process was rolled out in April, this did result in higher volatility, as can be seen in the daily index readings, however since that time the daily measure and monthly outputs have stabilised.
MB: Will CoreLogic be reverting its index to the old methodology given the RBA is questioning it?
Tim Lawless: The index methodology hasn’t changed. Changes to the sampling method will be maintained. The next iteration of our hedonic indices improvement process will be to release a new back series based on the 2016 GCCSA (capital city and rest of state) boundaries. At this time we will also publish the results of external audits of the index method as well as an updated white paper that provides the technical detail about the hedonic method used to calculate the home value indices.
Note that CoreLogic is the only index provider that publishes complete methodological detail about the construction of our indices. Our index model has been audited by reputable independent parties and we provide full transparency on the index movements on a daily basis.
MB: Does CoreLogic disagree with the RBA and why?
Tim Lawless: Our data is relied upon by those entrusted to maintain Australia’s financial systems’ stability and manage the country’s $1.6 Trillion economy . It is understandable that they are prudent in their usage of all available data inputs. We are confident that policy makers will continue to closely monitor our indices.
Outside of any changes made by CoreLogic in April and May, the month to month results have continued to reflect strong housing market conditions. In June, our combined capitals index showed a 0.7% rise, July showed a 0.8% increase, and the past 28 days have seen our daily 5 city aggregate index increase rise by 0.8%. Sydney and Melbourne are still showing stronger results, with monthly movements in June, July and the last 28 days around the 1% mark. Auction results are approaching the historic highs of mid-2015 and stock on market remains low which could add to upwards price pressures. The low volume of new stock currently becoming available for sale across a number of cities appears to be creating some urgency for active buyers and is probably contributing to the recent increase in auction clearance rates. The latest housing finance data releases from the ABS also indicates some increasing mortgage demand with the value of lending increasing by 1.8% in May and a further 2.3% in June. On the other hand, rental markets are quite soft with rents falling and yields at historical lows while settled sales activity is trending lower however, this is likely to be subject to some revision as off-the-plan units settle.
Importantly, there are many different measures of housing market performance. For example, the Residex repeat sales index (Residex is now a CoreLogic owned company), inherently relies on sales pairs and excludes new sales from capital growth calculations. At a time when we are moving through a record level of ‘off the plan’ unit settlements this is an important factor to consider.
Alternatively, the stratified median price measure used by APM and the Australian Bureau of Statistics (who utilise CoreLogic data to build their home price index) is based on only those properties that have transacted over the quarter, the results of which can be biased by different sectors of the market that are more active or inactive.
CoreLogic also produces indices based on the above methods, as well as simple medians, however our preferred benchmark for measuring value changes across the housing market is the hedonic regression method. The hedonic method tracks the overall portfolio value of the housing market from period to period by imputing the value of individual dwellings based on their unique attributes such as number of bedrooms and bathrooms, land area, location and housing type.
Since all these index methodologies are different, they cannot be directly compared, however over time the trends should broadly be aligned. The benefits of the hedonic regression technique will continue to be the timeliness of the results (one day in arrears), the overall portfolio valuation which excludes market bias and the measurement of true value shifts across the asset class rather than pricing movements based on individual sales.
In short, CoreLogic is steadfast in its view that house prices are still on a tear. If we believe CoreLogic, and hot housing markets are a concern for the RBA, then the bank is currently cutting interest rates on a false premise, from yesterday’s minutes:
Turning to the established housing market, members noted that most indicators pointed to an easing in conditions since late 2015. Recent data indicated that housing prices appeared to have grown modestly in the June quarter and had declined a little in most capital cities in July. Data on housing price growth from CoreLogic, which had been discussed at previous meetings, indicated that housing prices had increased very strongly in several cities in April and May. However, new information had revealed that these growth rates were overstated because of changes to CoreLogic’s methodology; data from other sources indicated that housing price growth had instead remained moderate in the June quarter. Other information showed that, while auction clearance rates had recently picked up a little in Sydney and Melbourne, the number of auctions was lower than in the preceding year and the average number of days that properties were on the market had increased. Housing credit growth had been little changed in recent months and remained below that of a year earlier. Rent inflation had declined to its lowest level since the mid 1990s and the rental vacancy rate had drifted higher to be close to its long-run average.
The RBA must clarify its position on house price indexes urgently.
