Monday, October 3, 2011

RP Data/Rismark, Australian property spin doctors?

It was interesting to see in the latest RP Data/Rismark property index release that they focused on a 'total return' for property rather than the capital losses that have continued to accrue over the past 18 months.
Strong rental growth rates combined with slowing dwelling value declines have seen home owners realise positive ‘total return’ growth in August (+0.2%). While national dwelling values fell by -0.4% (s.a.) (or -0.1% raw) in August, this was the smallest seasonally-adjusted decline since April 2011. Bucking the national trend, home values in Australia’s biggest city, Sydney, rose +0.4% in raw terms (0.0% s.a.) in August. Including gross rents, Sydney dwellings have delivered a total 3.4% return in 2011 year-to-date. Nationally, capital city dwellings also produced a +0.2% total return over 2011. RP Data
The Prince suggested in a tweet on Friday that perhaps this change:
"shows a secular shift to treating property as an income generating asset not for speculating capital gain"
I really wish that I could give RP Data the benefit of the doubt and agree with The Prince that they are turning a new leaf, however the timing of the change leaves me highly suspicious. I've been described (in real life) as a very cynical person, I wouldn't disagree, but it can be difficult not to be so in this situation when those responsible for reporting the data have a direct interest in prices appreciating.

As an example, a couple of years back Rismark boasted that they were 'Australia's first national "shared equity" investor'. They provided (and as far as I'm aware still do) funds for the Equity Finance Mortgage (EFM), a product which allocates an interest free portion of a loan to a buyer in exchange for a percentage of their capital gains when refinanced or sold. Rismark International receives a direct benefit from rising house prices and we are to trust them along with RP Data to provide unbiased property data and research? You have got to be kidding me!

RP Data has a history of trying to soften the blows that falling property prices are having on property owners, titling their data releases in such a way that it lessons the impact of falling prices...

In the August release (for July data) they headlined the title "Sydney and Canberra homes buck weak market conditions", concentrating attention on the couple of cities that were rising, rather than the majority which were not.

In September (for August data) they have headlined their release "Robust rental growth keeps total returns positive in August", concentrating on an obscure 'total return' calculation which in no way accurately reflects the return an owner (or rather mortgagee) would have seen after taking into account all the costs associated with owning/holding property.

They often refer to falling property prices as 'softening', which reminds me of a recent funny comment left by velociraptor on MacroBusiness:
Soft? Next time I reverse down the driveway I’m going to ask my son: “what am I doing right now?”, “Going backwards dad”, “No son I’m softening”
It's crazy (somewhat amusing really) that more often than not RP Data and Rismark seem incapable of calling a spade a spade.

They go on in Friday's release to describe briefly the introduction of the 'total return' index:
Using its hedonic index technology, RP Data-Rismark measure monthly capital and gross rental returns across Australia. RP Data-Rismark report capital returns as changes in the “value” of homes, and rental returns as “yields”. This month RP Data-Rismark will commence publishing a “total return” series, which was always available in the underlying data as an “accumulation index” (the ASX also publishes accumulation indices that include dividends).
What they fail to include in their report is the many costs associated with property investment. These costs vary so much property to property, state to state, so it is perhaps not practical for them to include it in their report, however comments to the effect of "Our 'total return' index should not be used as an indication of an actual real life return" would probably be appropriate.

In many cases investors maintain a high LVR so as to maximise their leverage in this asset class and to take advantage of the tax benefits they receive for doing so. So realistically many property investors would have not only seen their equity fall as a result of falling prices in August, but they are also out of pocket for:

- Difference in cost between rent received and interest paid
- Property transaction costs
- Land tax in some cases
- Accountant fees
- Council rates (and in some cases water rates)
- Maintenance costs
- Emergency (and other various) levies
- Property management fees
(+ Any taxation benefits)

The only reason you would buy a negatively geared property (Australia's favourite type of property investment) is if the capital gains were to exceed all other costs (such as those listed above).

With the way that most Australian property investors structure and position themselves I think it is pretty deceiving the way RP Data and Rismark have suggested that a positive return would have been seen over the month of August. Even if we did concede that property had seen a growth rate of .2% in August, one would still have been better off keeping cash in the bank (earning term deposit interest rates) and the return is still not exceeding the inflation rate to show a REAL return.

Property owners and investors will continue to suffer over the medium term in my opinion with those in a negatively geared situation suffering out of pocket expenses to hold an asset which will continue to fall in price for many years to come. Let's hope that companies relied on for analysis and data can produce realistic reports on the state of the market rather than trying to spruce things up with wording and irrelevant indices which don't reflect the seriousness of the situation.


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  1. Great article. I found this by searching for "RP Data-Rismark" trust. I'd read yet another puff piece in the SMH from RPData and I just couldn't swallow what they were saying.

    I find it pretty disgusting considering the cozy relationship Fairfax has with the property industry.

    Keep up the good work!

  2. Thanks Mark, they certainly know how to put spin on their commentary!

    By the way I don't regularly cover the property market, but the bloggers over at MacroBusiness are doing a fantastic job if further commentary on RP Data releases are of interest, e.g. here is their latest: