Wednesday, April 18, 2012

Great Australian Dream: Selling Your Own Home

They say that the great Australian dream is to buy your own home. An action which, according to the property spruikers, will put you onto the first step of wealth creation (regardless of when you buy, just get that foot in the door!) or if you ask most baby boomers will set you up with a secure foundation from which to start your family. 

Recent property market figures however suggest that the great Australian dream at the moment is the ability to sell your own home (without taking a large price hit). This is a dream which many were unable to realise as the volume of property sales fell to a 15 year low, collapsing in January to around half the number seen in January 2010 or 2011 (so more than just a seasonal drop):

The above screenshot was captured from the latest RP Data Market Update, courtesy of MacroBusiness. In the update provided by Tim Lawless (Head of Research at RP Data) he fails to adequately address the huge drop in volume in January and rather concentrates more on the minimal rise that we saw in prices over the month of March (.2% rise over March, flat over the quarter over the 8 capital cities). As pointed out by Leith at MacroBusiness the rise in March is not seasonally adjusted so the insignificant rise is really a flat result:
The RP Data-Rismark daily index is not seasonally adjusted. And according to the 2010 and 2011 March house price releases from RP Data-Rismark (see here and here), the seasonally adjusted result was between -0.2% and -0.3% lower than the unadjusted (non-seasonally adjusted) figure. This implies that Australian dwelling values typically rise during the month of March and that the 0.2% rise in March 2012 was actually ‘flat’ in seasonally adjusted terms. Link
Leith also points to the slides presented which show that housing finance (excluding refinancing) is tracking near 15 year lows:

And listings are still elevated, not far from the peak we saw last year:

Another interesting chart was this one, showing auction rates rebounded in March:

What Tim Lawless failed to mention when showing this chart was that the bounce in March auction results is seasonal and we saw this in both 2010 and 2011. This was also recently covered by Louis Christopher who got quite angry with the RBA for mentioning the rise in clearance rates without addressing the seasonal factor (this from last nights newsletter, signup here to receive it):

Some words from our Managing Director, Louis Christopher -
"Today the Reserve Bank of Australia (RBA) released it minutes from their most recent board meeting. You can find them here:
Readers, I present this to you for one main reason. 
As you will see, the RBA stated in its minutes the following:
".....They (Developers) noted the apparent sensitivity of developers to the outlook for dwelling prices. New dwelling construction had fallen in the December quarter and there was little sign of a pick-up in building or loan approvals, though house prices had shown some signs of stabilising recently. While Auction clearance rates in Sydney and Melbourne had picked up a bit of late, they remained below their average levels."
As a long term researcher and housing market data provider, I am deeply concerned by these comments expressed today by the RBA.
Let me tell you now, house prices have not "stabilised". In many parts of the country, they are still falling. And auction clearance rates are WEAKER than recorded this time last year. The rise that has happened of late (and it's not much of a rise at that) is strictly seasonal. The RBA should typically know this and yet are still suggesting that there is stabilisation in the market. Well, not for Melbourne and not for Sydney and not for Canberra and not for Hobart and there are still some question marks on Brisbane and there are still no signs of the Gold Coast or Sunshine Coast coming out of their property crash.
I think the only cities we could suggest that there has been a genuine bottoming now are Perth and Darwin.
I can only hope that the RBA is not relying on daily house price indexes that moronically suggest that Melbourne house prices rose 1.8% in January. Or relying on certain commentators who have suggested deceitfully that auction clearance rates are in genuine recovery when clearly they are not.
And I can only hope that the RBA did not rely on these "indicators" to the point of keeping rates on hold this month."
While there are some data points that reflect a stabilising property market, there are many more than indicate that this year will see much the same as we did last year with prices continuing their slow fall.

Toward the end of the video Tim mentions that arrears rates are low by international standards, but as recently pointed out by Chris Vedelago (in an article about Numberwang!) the rate is still high in comparison to 10 years ago and it's somewhat hypocritical that these commentators are happy to compare Australia to our overseas counterparts in some instances and not others:
Take the home loan delinquency data in the Reserve Bank’s latest Financial Stability Review, which shows 90+ day arrears have climbed near-steadily for the last eight years but declined 0.1 per cent the last six months.
So how was it presented?
‘‘While arrears rates on mortgages are still above average, they have eased a little recently, and remain low by international standards,’’ the RBA said.
In fact, the 0.1 per cent decline was characterised as a ‘‘drop off’’ by Rismark International economist Chris Joye, who noted that while arrears ‘‘have risen steadily...they remain no higher than they were in the mid-1990s’’.
It doesn’t seem to matter that the ‘‘drop off’’ came about at a time when interest rates have been cut below their historic norms. Nor that a delinquency rate of 0.6 per cent is still more than three times what it was in 2003.
Some might also think that having a deliquency rate today that’s comparable to a period in the mid-1990s when the standard viable mortgage rate hit 10.5 per cent isn’t a sign of strength.
But it’s the reference to ‘‘low by international standards’’ that provides the real laugh.
How is it that many of the same people who decry the use of throw-away comparisons between Australia and overseas property markets when battling the ‘‘destructionistas’’ in the housing bubble debate seem happy to use them when pushing their own ideological wheelbarrows?
The poor data of late hasn't stopped many commentators from calling a bottom in the housing market, for example...

Residex CEO John Edwards recently commented:
“Prices continued to weaken in almost every capital city over January. Our data suggests we are moving beyond the bottom of the cycle however the trend is not pronounced,” Mr Edwards said.
RP Data's Tim Lawless (Research Director) and Ben Skilbeck (Managing Director, Rismark) have said:
Australia's house prices fell in every quarter last year but they may have hit bottom, new figures show.
Housing data released by RP Data-Rismark today shows that the rate of decline in house prices across the nation slowed towards the end of last year.
"The December quarter was the year's smallest quarterly decline," RP Data research director Tim Lawless said.
"One of the things we're expecting to see following the interest rates cuts last November is more activity," Rismark managing director Ben Skilbeck said.
"We expect transaction volumes to pick up in February and March," he said. "We would expect the negative growth to abate."
Earlier in the year Christopher Joye said:
And now we have mounting evidence that the housing market is staging a slow recovery, as I’ve projected in these pages for some time. The key catalyst appears to have been the RBA’s decision to swing 180 degrees from expecting to hike interest rates to cutting them in November and again in December.
If the RBA cuts again in February, and further thereafter, as some analysts believe they will, expect to see the return of rapid house price appreciation. As I've said before, housing (and bank-intermediated credit growth) will be the chief beneficiary of any interest rate relief.
Granted we didn't see the rate cut in February, but Joye has continued to suggest we will see house prices rise on the back of interest rate cuts when they do come.

Few of the above commentators appear to be looking at the full picture and are rather cherry picking data and sprinkling some pixie dust over the top in the hopes that we see a recovery in the data they aren't talking about.

My opinion since late 2009 is that we will see a correction in nominal terms of 15-20% over 3-5 years and likely further deterioration in real prices as lower than inflation price growth follows for several more years. This scenario looks to be playing out and is set to continue unless we see a substantial increase in mortgage activity and sales volumes pickup to reduce the elevated stock on market levels. If the volume of sales in January was in any way an indication of the interest property will see this year then the correction *could* accelerate to the downside as vendors have to accept lower and lower prices to find an interested/financed buyer.

Could a couple of rate cuts be enough to spur above inflation growth? It's unlikely that they will by themselves and in my opinion the rate cuts would need to be coupled with government intervention again to see real growth. In 2008 it took a multi-pronged approach with government splashing cash around everywhere to boost prices (as I pointed out in this blog post last year) and even then the stimulus quickly wore off. Something that the government is unlikely to repeat given their recent belt tightening in light of trying to return from deficit spending to a surplus.

While property sellers dream of ridding themselves of their properties in this slow market without taking too big a price impact, I'm sipping cocktails in my home near the beach which I'm renting for around half what it would cost me to buy and have my capital tied up in assets which are appreciating at a faster rate than a term deposit.

/raises my glass to renters living the new Australian dream/

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  1. Note: Ben Skilbeck is Rismark MD, not of RP Data. He took that position after Chris Joye was dethroned by Macquarie Bank.

    1. Thanks for that, corrected. Need to fire my editor!