Christopher Joye writes in Business Spectator today:

Notwithstanding the silly predictions of some commentators, Australia’s residential property market delivered resilient performance during the first quarter of 2009 with the RP Data-Rismark National Dwelling Value Index rising a robust 1.6 per cent.*

Over the three months to end March 2009 Australian capital city house values increased by 1.5 per cent whereas unit values rose by 2 per cent reflecting the relative affordability of the latter.

Of the mainland capitals, Darwin (+2.8 per cent), Sydney (+2.4 per cent), Melbourne (+2.4 per cent), Canberra (+1.4 per cent) and Brisbane (+1.3 per cent) led the charge during this period. The laggards were Adelaide (-0.3 per cent) and Perth (-0.7 per cent).

The staunch performance of Australia’s housing market follows on from modest 3 per cent falls in home values during 2008 (according to both the ABS and RP Data-Rismark Indices) primarily as a result of mortgage rates peaking at 9.6 per cent in August 2008. Inclusive of rents, Australian residential returns were actually positive in 2008.

Source: RP Data-Rismark

In comparison, the ASX All Ordinaries Accumulation Index has fallen by -31 per cent over the 12 months to end March 2009 while the ASX Listed Property Trust Accumulation Index has declined by -58 per cent. The global equity hedge funds research index is also down -22 per cent. And the default Australian super fund, which still has a ridiculously high 55 per cent weight to Australian and offshore equities (even after the correction), is down by about 20 per cent over the last year with its three year return also in negative territory.

The stabilisation in house price has been driven by the 40 per cent plus fall in mortgage rates to 5.7 per cent, which is their lowest level since July 1968 (over 95 per cent of all new borrowers are on variable rate loans).

The RBA’s cuts to its cash rate have seen the ratio of total household interest payments to disposable income fall rapidly from 15 per cent to 10 per cent (does that sound like much?). Households are also voluntarily deleveraging through higher levels of savings with Australia’s savings rate now at its strongest level since the mid to late 1980s. This augurs well for the ability of future home buyers to service their debt.

These market outcomes are positive news for the government since they should further encourage the construction industry to ramp up new building (which has a 1.85x economic “multiplier”) in a much needed attempt to remedy the housing shortage that ANZ and Westpac estimate will hit over 200,000 homes by 2010.

The key risk to the housing market is now credit rationing. Yet with the major banks benefiting from rising net interest margins combined with super low 15-25 per cent risk-weightings on home loans (versus a 100 per cent risk-weighting for business lending), it is hard to see them pulling back hard in this area. As I explained here, doomsday claims about the impact of rising unemployment also don’t stack up.

While the boost to the first home owners grant has certainly helped support demand, the hyperbole around this subject ignores the fact that 70-75 per cent of all buyers in the market are not first timers.

The most expensive (cheapest) houses are in Sydney (Adelaide) where the median house value is $565,928 ($410,442). The most expensive (cheapest) units are in Perth (Brisbane) where the median house value is $439,042 ($330,390).

National capital city gross rental yields for houses (units) are 4.6 per cent (5.4 per cent).

Assuming that an investor has an 80 per cent loan with a discounted 5.3 per cent rate, gross rents cover all mortgage repayment costs (ie, positively gear) for units across Australia.

The RBA has been at pains to highlight the fact that Australia’s housing market has actually led the US and UK by three years with our boom ending in late 2003. Here the RBA’s Dr Tony Richards recently commented, “The growth rate of house prices in the past five years has been well below the eight per cent average annual nominal growth in household disposable incomes.”

While there has been some critical commentary around the level of mortgage debt in the community, we estimate that the average Australian home loan-to-property value ratio is just slightly north of 50 per cent. That is, the average home owner with a mortgage has around 50 per cent equity in their home (nb: according to the 2006 census only around half of all home owners have any mortgage debt at all).

Although the growth in mortgage debt during the 1990s did significantly outpace GDP, this came about because of a radical reduction in its cost. Home loan rates averaged a remarkably high 13.2 per cent during the 1980s. Over the ten years to December 2008, home loan rates averaged just 7.3 per cent. This was a result of the RBA’s move to an “inflation-targeting” regime in the early 1990s (and central bank independence), which has been accompanied by a structural shift downwards in long-term inflation expectations and interest rates. Another consequence has been a once-off shift upwards in Australia’s house price to income ratio, as the RBA has observed (p. 49).

The RP Data-Rismark Index, which is reported by the RBA and was recently selected by the ASX as its preferred housing benchmark, benefits from Australia’s largest property database that captures information from 25 different government agencies that ultimately account for 100 per cent of all Australian home sales.

Yet Crikey’s Adam Schwab, who likes to opine on housing matters, has claimed that “Despite the importance of dwelling assets to many Australians, there is no accurate and transparent body which provides historical price information about property to investors or home-owners. Unlike publicly traded companies…price data regarding residential property is generally provided by real estate bodies.”

Schwab is wrong.

First, the ABS provides historical house price index data going back to the mid 1980s on a city-by-city basis (as do many other index suppliers).

Second, since State governments levy stamp duty on all residential transactions, Australia is in the fortunate position where government agencies—typically Valuer Generals offices—collect 100 per cent of all property sales data and make this available to index providers (who in turn purvey it to the public).

Accordingly, Australian house price indices normally reflect 100% of all sales.

In contrast, most US and UK indices typically only collect a small share of the transactions in the market and therefore suffer from nontrivial biases.

The RP Data-Rismark Index also employs a sophisticated “hedonic” regression methodology that overcomes the compositional biases that afflict cruder median price indices.

In private communications, the RBA has commented to me that it believes that Australia has the best house price data in the world.

*Important note: On a quarterly basis (ie, comparing the first quarter of 2009 with the fourth quarter of 2008), which is the method used by the ABS, Australian residential property values were up 0.1 per cent according to the RP Data-Rismark Index. However, quarterly index estimates are “transaction weighted” and since January currently has the largest number of sales (given there are delays in getting 100 per cent of sales from government agencies for February and March), January has a far higher weight in a quarterly index and therefore puts a downward bias on the results (since January was flat due to seasonality). A monthly index affords more accurate estimates of changes in residential property values over time.

Christopher Joye is CEO of Rismark International. Rismark’s business benefits from house prices both rising and, with the advent of the ASX residential property derivatives market, falling.

Adam Scwab responds:

Property bull, Business Spectator columnist and the CEO of Rismark, Chris Joye, yesterday penned his quarterly synopsis of the Australian property market. As usual, Joye’s views were laced with optimism, claiming that “Australia’s residential property market delivered a resilient performance during the first quarter of 2009, with the RP Data-Rismark National Dwelling Value Index rising a robust 1.6 per cent.” Joye continued, “the stabilisation in house price has been driven by the 40 per cent plus fall in mortgage rates to 5.7 per cent, which is their lowest level since July 1968 (over 95 per cent of all new borrowers are on variable rate loans).”

Strangely, Joye noted that last year the Australian housing market encountered a “modest 3 per cent fall in home values” – this begs the question, how is a 1.6 percent rise “robust”, yet a 3 percent fall “modest”?

While this writer disagrees with his overall view, Joye is certainly no fool – his writings on issues such as economic stimulus and the proposed RuddBank have been amongst the most convincing produced by any Australian economist. However, when it comes to property prices, Joye tends to place very little weight on negative factors, such as the likelihood of double digit unemployment (and far higher ‘under-employment’), the removal of artificial stimulus like the first home owner’s grant and interest rates rising off their historic lows. (I reply, Joye often points to the rise in nominal house prices during the recession of the early 1990s, ignoring the fact that interest rates fell during that period from around 17 to less than 9 percent and in real terms, property prices actually fell over that period).

Joye also has a personal interest in a strong housing market, his company, Rismark, offers an innovative (and in this writer’s view, excellent) product called an Equity Finance Mortgage. EFM’s allow home buyers to effectively sell some of the equity in their home to investors (and can use those funds to upgrade the premises or retire debt). The only problem with EFMs is that in a falling market, it would be extremely difficult to find people who would want to directly invest in the residential property market. It is hard to envisage Rismark enjoying growth in revenue from their EFM product should the residential property market encounter a prolonged period of negative growth as is being felt in the US, UK, Ireland, Spain or Germany.

While the overall property market has remained remarkable buoyant in the first quarter of 2009, this has been largely caused by the Federal Government’s boosted First Home Owner’s Grant. For example, when coupled with leverage, the $14,000 grant gives first home buyers an extra $140,000 in buying power (at an LVR of 90 percent). Joye however, largely dismissed the effect of the FHOG, claiming:

While the boost to the first home owners grant has certainly helped support demand, the hyperbole around this subject ignores the fact that 70-75 per cent of all buyers in the market are not first timers.

This view may be technically correct but provides a distorted conclusion of reality (by omission). While first home buyers make up a relatively small proportion of the market, their effect since the introduction of the FHOG has been far very significant. As Dan Denning, writing in the Daily Reckoning earlier this month stated:

The amount of money committed to housing rose 1.3% in seasonally adjusted terms, from $18.9 billion in January to $19.2 billion in February. You can credit that rise to the [First Home Buyers]. Their share of the market for new commitments to owner-occupied housing grew from 26.5% in January to 26.9% in February.

Remember, in January of ’08-before the increase in the Federal FBH grant-new first home buyers made up just 12.1% of the housing finance commitments. Their contribution to the money flowing into the housing market has grown 122% since then. But will they get what they paid (borrowed for)?

We continue to believe that you are seeing the blow-off phase of Australia’s property bubble. It’s one of the last remaining housing bubbles in the world yet to pop. But the introduction of the FHBs into the market as a key support of property prices is a sign that it may be near its peak. And that is not good news for the FHBs.

The ABS reports that the FHBs are paying nearly 11% more for their new homes than other owner occupiers.

As Denning noted, while the first home buyer’s still only make up a quarter of total property acquirers, that proportion has more than doubled since the grant was boosted. Take away the stimulus and the ‘affordable’ end of the market may have seen similar falls to the top end (which in many suburbs has seen values drop by more than 20 percent from their peak).

Finally, Joye took a swipe at my comments from last year regarding availability of property price information, noting:

Crikey’s Adam Schwab, who likes to opine on housing matters, has claimed that: “Despite the importance of dwelling assets to many Australians, there is no accurate and transparent body which provides historical price information about property to investors or home-owners. Unlike publicly traded companies…price data regarding residential property is generally provided by real estate bodies.”

Schwab is way wrong.

First, the ABS provides historical house price index data going back to the mid 1980s on a city-by-city basis (as do many other index suppliers).

Second, since state governments levy stamp duty on all residential transactions, Australia is in the fortunate position where government agencies – typically Valuers General offices – collect 100 per cent of all property sales data and make this available to index providers (who in turn purvey it to the public).

The only problem is, I wasn’t actually wrong, and nothing Joye says proves as much. Price data is generally provided by real estate bodies – the information you read in Sunday papers is almost always provided by bodies such as the Real Estate Institute of Victoria (which is made up of real estate agents). While the ABS provides index data, that is utterly useless to someone purchasing a specific property (if you are buying BHP shares, do you care about BHP’s price history and earnings potential or how the Mining Index has performed?). Further, while you can purchase historical information from the likes of RP Data, the information is costly and not easy to obtain (particularly for ‘mum and dad’ investors). This is completely different to a share market investor who can access a wealth of free information from the likes of the ASX or specific company websites. The vast majority of property purchasers would not have complete historical information when acquiring a new property, usually to their detriment.

There is no doubt the residential property market has held up remarkably well, especially when compared to equities and overseas markets. However, how Australia’s favourite asset class will perform when the first home owner’s grant is removed, unemployment hits 10 percent and interest rates rise is another matter entirely.

Peter Fray

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