From the CEO

We’ve all heard the phrase ‘someone’s loss is someone else’s gain’. Quite a fitting statement for the situation we are presented with in the property market right now as good opportunities have come about over the past few weeks for investors, while sellers are losing out.

Misinformation, incorrect reporting or misunderstandings of what has been said has potentially caused a situation where for those of us who have bought in the market over the last month will probably make windfall profits while those who are selling will have not made the profits they should have; in fact some sellers will have lost money unnecessarily.

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. The party who led this view was making this statement because it was convinced that it should report housing growth performance on seasonally adjusted terms. My long experience tells me that this is inappropriate for a lot of reasons, which I will discuss further in this newsletter.

On this topic, I am not alone. Michael Sherris, Professor of Actuarial Studies at the Australian School of Business, and his research team are currently working with Residex on a number of different projects.

Professor Sherris said, “It is clear that there is seasonality in some housing markets but notwithstanding that, it is not reasonable to adjust growth numbers by a seasonal factor if the actual level and performance of the market is what is being measured.”

Most importantly, the ordinary Australian doesn’t understand statistics as analyst do and hence could be selling their most valuable asset, their home, under misconceived views that housing values are seriously correcting. As a consequence, these people were probably accepting a price for their home that was lower than it should have been.

Again, as a long term analyst, I know that the housing markets are important to each of us individually and to a very large number of businesses. Incorrect information will have cost us all, as our confidence was turned down and businesses failed to transact deals that would otherwise have been completed as the market reacted to an overly pessimistic view of what was happening.

So what happened? A well-known Australian research company within the industry reported that home values across Australia softened by -2.1 per cent (seasonally adjusted) over the March quarter (-0.4 per cent in raw terms). The raw number was the real result or close to it. (Residex, have reported that houses fell in value by 0.55 per cent for the quarter while units in fact increased in value by 0.65 per cent.)

It is not the fault of journalists who reported that house values fell by 2.1 per cent. In reading what was written, you could be forgiven for interpreting the large fall. However, what was really meant by what was said?

Over the long term, the usual growth rate in property in the March quarter is 1.7 per cent (as calculated by them) and during the March quarter just past, house values didn’t perform as well as they typically do, which is producing a growth rate of the 1.7 per cent. Values fell by 0.4 per cent, meaning they performed 2.1 per cent worse than they typically do on average in a March quarter – so no great fall, just worse than what is typically.

There are many questions that flow from the statements that were made such as does the organisation that made the statements have a dataset that is of sufficient duration and depth to allow them to make the assessment of what the typical March quarter growth rate is? Are seasonally adjusted house prices relevant in a housing market at all? Do the analysts adjust their numbers for mistakes the following quarter or month when they receive more data, and do they tell the market about the magnitude of the adjustments?

To me, the position is clear. The party’s reliable calculations on growth rates they release are for less than a decade This will hinder its capacity to be able to say what a typical growth rate for a quarter is, unless the last decade was a typical market, which personally I don’t think it was.

They also adjust their numbers each month as more data comes in and tell us these adjustments are typically around 0.5 per cent in any given month. Do they widely publicise the adjustment? No, they don’t seem to, or at least I haven’t ever read that their numbers last month were adjusted or corrected by a certain percentage.

Finally, should you seasonally adjust figures at all? Personally, I don’t think so. We are not measuring a commodity like wheat or wool production, or for that matter housing approvals or lending activity. We are measuring a fixed asset value and it is important not to confuse people and only present what has actually happened. If you want to argue that you should do seasonality adjustment to housing growth rates, then I ask why markets aren’t seasonally adjusting the growth rate in BHP Billiton share prices or gold prices, or for that matter the daily change in the ASX 200 index. Generally, seasonality is a measure of events, not physical assets. If you want to seasonally adjust anything regarding our housing markets then it is sales activity, which is what Residex constantly does in statistics it releases.

Residex databases date back up to 35 years plus for capital cities across Australia and using that data, along with our proven robust index technology, we assess the market for seasonality and present the results in Table 1. The median growth rate quarter by quarter is displayed, together with a measure of the existence of seasonality. We measure the potential for seasonality by presenting a number between 0 and 1 (for the statistically minded it is the p value). A number less than 0.05 indicates that there is little argument that can be made that seasonality doesn’t exist and as the number gets closer to 1 the higher the chance of there being no seasonality.

Table 1

The table tells us what you would expect. In locations where there are extremes of climate there is a seasonal growth factor but in moderate climates, where there is very limited variation in seasons, there is limited to no seasonality. Hence, in Brisbane there is no seasonality while the market in Melbourne does have a quieter period in winter and in Darwin the market has a quieter time in summer. As the analysis outcome presents a clear logical explanation, then we can be reasonably certain that we are right.   

This information is useful and important in understanding how a market is travelling but should we undermine the population’s confidence in a major asset class and lead them to believe they are suffering a reduction in asset values when in fact the adjustment is so small that it is almost irrelevant? Remember, the seasonality factor (Median Quarterly Growth) we have quoted in 50 per cent of cases will be less. The seasonality we measure and show simply indicates if the market is doing better or worse than normal. It should not be used to tell people what has happened to the value of their property.

Another important thing is, there are dangers in combining houses and units into one group. Houses and units have different return characteristics, particularly in seasonality terms. For example, we have just established that there is some seasonality in houses in Melbourne and Sydney (as seen in Table 1), now let’s look at the unit market in these cities in Table 2 and compare.

Table 2a

Table 2b

I am sure you will immediately see that the seasonality in the unit market is different to that of the housing market. The result is that, it is incorrect to make blanket statements about a collective housing market on seasonally adjusted terms.

So what is it we can we make of all this? A desire to generate a point of difference that is causing confusion.

The market simply performed as we said in our last newsletter – it is softer than we would all like and houses lost value by 0.55 per cent while units increased by 0.65 per cent. I say this with confidence as Residex does not adjust or revise numbers as more data comes in, its does not have to as the method used is robust enough to not require revision.

Is the market atypical in recent growth terms? Yes it is, but we all knew that.

Did the median house value in Australia fall in value by 2.1 per cent in the March quarter? No it didn’t. On their numbers it fell in value by just 0.4 per cent and basically, housing values were steady.

I am raising these concerns because the statements that have been made have had, in my view, an arguable effect on our markets, and in particular to those markets that were already soft. There is normally an event or cause that produces a market reaction that is so noticeable, and I am looking for that cause given the current April numbers. Importantly, if the party concerned continues to release data as they are currently doing, and the press continues to report as they are, then the effect could well precipitate something that our government, bankers and Reserve Bank would not like to see.

I would expect that the sense in what I am suggesting should be enough for those concerned to cause a halt and a review of the sense of seasonally adjusting growth numbers, and only seasonally adjusting sales volumes as we do at Residex.

Fortunately, for those of who are investors, this misleading information is to your advantage. A softer market means better buying opportunities, and sooner or later the market, and those who have the power and skills, will question the validity of the numbers, take little notice and inform, and as a consequence prices will move back to where they should be, resulting in unexpected profits. However, for the homeowner who has had to sell into this market it is not such a bright picture. Equally, for those who are dependant on income from our housing markets it is also not a desirable position.

The Residex predicted outcome for our markets does not present as though it is about to takeoff or collapse. Affordability issues are going to drive rentals and capital growth in the more unaffordable areas is going to be limited. Best growth will be achieved in the lower cost markets and our analysis suggests, at this time, that Sydney presents opportunity and that Brisbane will also move forward sooner rather than later. Both of these capital cities have a level of stock shortage that will minimise the impact of misleading data, and clearly, given the floods in Queensland, Brisbane is of higher risk than Sydney.

Until next time, happy investing!

John Edwards,
Founder and CEO of Residex Pty Ltd.

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