Wednesday, January 06, 2010

What gives with RP Data? What gives with Kris?

Kris "began his financial career in the City of London as a broker specializing in small cap stocks listed on London’s Alternative Investment Market. At one of Australia’s leading wealth management firms, Kris was a fully accredited adviser in Shares, Options and Warrants, and Foreign Exchange"

He has written a rant about RP Data and also The Age that I've reprinted in full below.

Clearing things up for him gives me an provides an opportunity to set out clearly what RP Data actually does.

It's worth it.

Let's start with Kris:


Today you’ll read more about the shocking lies peddled by the property hucksters.

Take the weekend headline from Melbourne’s The Age newspaper: “Housing prices soar 17% to record.”

The reporters at The Age receive the press release from property spruikers RP Data and automatically assume everything it contains is true.



Well, err no Kris. What I wrote went beyond the press release. You can compare the two here. The key figure I quoted appears nowhere in the press release.


But the number from RP Data truly is amazing. It’s “proof” of the continuing strength of the property market. A property market where the average house price has risen by nearly $100,000 in a month.

That’s right, in one month!

Ah, if only it were true, we could all go out and sell our houses and be rich. Or better still, hold on for another month and make another $100,000. Too easy.

Of course, nothing’s that simple. And this is no exception.

You see, if we refer back to a report from ABC News on November 30th it tells you: “Melbourne leads the nation’s house price boom, with values up 14.9 per cent in the 10 months to the end of October to an average of $481,247.”



For someone who doesn't trust the mainstream press Kris places considerable reliance on it.

The figure $481,247 "house price" figure quoted by the ABC is actually the RP Data figure for "all dwellings", houses as well as lower-priced units.

Kris is about to compare apples with oranges.


Which makes the report from The Age at the weekend a little puzzling, because based on the latest numbers from RP Data, The Age tells you that: “The latest RP Data index, compiled from Valuer-General’s figures, indicates the Melbourne median house price hit a new record of about $580,000 in November.”

This we’re told is an increase of “17 per cent in the first 11 months of 2009.”



This is another misunderstanding, a popular one.

The $580,000 figure does not relate to the 17 per cent figure.

RP Data does two quite different things, one of them simple and one of them hard.

The simple one is to access the Land Titles or Valuer Generals' figures (depending on the state) and report the median price of the properties that happened to change hands that month.

In November it was $580,000. But it bounces around depending on what's sold that month. Some months a lot of inherently high-value properties are sold, some months a lot of inherently low-value properties.

It tells you nothing about movements in the price of actual properties.

RP Data's separate, much more difficult task is to painstakingly compare like-for-like sales. Footscray 3-bedroom houses with Footscray 3-bedroom houses, and so on.

That's where the 17 per cent figure comes from. It need bear no relationship to the $580,000 figure.

Hence his confusion:


Something’s wrong there. Because we thought the October number was a 14.9 per cent increase. Suddenly an extra 20% increase in just one month only works out as a 17 per cent increase over eleven months. No, the numbers just don’t add up.


Under the heading "Cooking the property books" he says:


The median figure received a nice little boost thanks to the three Melbourne properties that each sold for more than $20 million in November.


Err, no it didn't Kris. The median is unaffected by such things as your commenters have pointed out.


Not that the mainstream press would bother to mention that.


Too right the mainstream press would not mention such an effect.


Incidentally, we’ll be intrigued to see how the December median house price numbers for Perth are reported and whether any mention is made of the $57.5 million sale of iron ore magnate Angela Bennett’s mansion.


The $57.5 million sale of iron ore magnate Angela Bennett’s mansion won't make any difference to the December median Perth house price.


"Whatever the excuses, as we mentioned recently, you can take these property indexes and throw them to the dogs. They’re worthless.


I too have been critical of property indexes. But my criticism stems from actual inquiries into how they are constructed.

Kris could acquaint himself with what RP Data actually does.

In any event, as one of his commenters says: "regardless of whether or not you believe the RPData figures, the Australian Bureau of Statistics also says house prices are rising strongly, as do Residex and APM."

And elsewhere in his post Kris indicates that he does believe house prices are rising strongly, observing that


borrowers are keen to jump onboard the property ladder before prices take off to Jupiter – forget the moon, they’ve gone way past that.


The very latest indirect evidence comes in this table from the mortgage broker AFG. In November their mortgage sizes in NSW and Victoria hit record highs. Although in December they slipped back. Like I said, things bounce around from month to month:





Here's Kris in full:


Did Aussie Rules Football Stop a Property Collapse?

by KRIS SAYCE on JANUARY 4, 2010

Well that doesn’t sound right does it?

Only a fool would think such a thing. But as I’ll show you later, the possibility of the AFL being the saviour of the Australian property market has just as much credibility as the latest desperate excuse put forward by property spruikers.

You’ve seen the headlines over the last twelve months – the Australian property sector has been strong due to a housing shortage, a rising population, and the fact that things are… well, different here.


Further than that, you’ve also been told that spending on property kept the economy from going into recession.

As you’ll have heard, if all is well in the property market then everything must be fine with the economy.

It’s just a shame it’s not true.

In fact, it’s more likely that the huge spending on property is actually a sign of a morbidly sick economy rather than a strong economy – but more on that later this week.

Because today you’ll read more about the shocking lies peddled by the property hucksters.

Take the weekend headline from Melbourne’s The Age newspaper: “Housing prices soar 17% to record.”

The reporters at The Age receive the press release from property spruikers RP Data and automatically assume everything it contains is true. The Age seems to have ripped off Fox News’ “We Report, You Decide,” slogan.

Except they’ve amended it to “We Report – Whatever We’re Told.”

The Age also quotes serial property ramper-upper Craig James from CommSec, “With population growing at the fastest rate in 40 years boosting demand for homes, state and federal governments need to be focused on ways to get more homes built.”

Yeah, that’s right Craig, it’s the population boom! Only it isn’t, more on that later…

Melbourne’s houses up $100,000 in 30 days…

But the number from RP Data truly is amazing. It’s “proof” of the continuing strength of the property market. A property market where the average house price has risen by nearly $100,000 in a month.

That’s right, in one month!

Ah, if only it were true, we could all go out and sell our houses and be rich. Or better still, hold on for another month and make another $100,000. Too easy.

Of course, nothing’s that simple. And this is no exception.

You see, if we refer back to a report from ABC News on November 30th it tells you: “Melbourne leads the nation’s house price boom, with values up 14.9 per cent in the 10 months to the end of October to an average of $481,247.”

Which makes the report from The Age at the weekend a little puzzling, because based on the latest numbers from RP Data, The Age tells you that: “The latest RP Data index, compiled from Valuer-General’s figures, indicates the Melbourne median house price hit a new record of about $580,000 in November.”

This we’re told is an increase of “17 per cent in the first 11 months of 2009.”

Something’s wrong there. Because we thought the October number was a 14.9 per cent increase. Suddenly an extra 20% increase in just one month only works out as a 17 per cent increase over eleven months.

Cooking the property books

No, the numbers just don’t add up. Has the average price of a Melbourne home really increased by $98,753 in the space of one month?

It has if the reporting of RP Data’s housing stats is anything to go by. But anyone who thinks about it for even a second will realise RP Data’s numbers are a bigger joke than what you’ll find in a Christmas cracker.

Although, as “respected” economist Craig James from CommSec will tell you, it’s all about the rising population.

Either that, or the median figure received a nice little boost thanks to the three Melbourne properties that each sold for more than $20 million in November.

Not that the mainstream press would bother to mention that. Not when a housing shortage and rising population numbers are a much more convenient excuse.

Incidentally, we’ll be intrigued to see how the December median house price numbers for Perth are reported and whether any mention is made of the $57.5 million sale of iron ore magnate Angela Bennett’s mansion.

Whatever the excuses, as we mentioned recently, you can take these property indexes and throw them to the dogs. They’re worthless. A $100,000 or 20% rise over a period of a month is proof of that.

But it seems the property cheerleaders haven’t made a new year’s resolution to tell the truth this year. Because if they had then they’d scrap their dodgy indexes. And they’d drop the fibs about housing shortages and immigration

Or the latest gem, that “The population is just different here.” That’s another one from RP Data.

They don’t stop. They’re relentless. RP Data claims that high house prices are sustainable here because “64.1 per cent of people live in the capital cities.”

The argument is that because one-fifth of the Australian population lives in Sydney, and nearly another fifth in Melbourne, then it naturally means house prices will stay high and there won’t be a price crash.

We think we’ve heard it all now.

Desperate tactics by property spruikers

But we will admit it, it’s clever. The ruse about 64.1% of the Australian population living in just half a dozen cities being the reason for the strength of the Australian housing market is a very clever illusion.

People will fall for it because it’s the kind of argument that looks convincing. Take two unrelated factors, match them up and then claim that one is the cause of the other.

The trouble is it’s a complete fib. It’s a claim made with absolutely no basis in fact whatsoever.

It’s false logic – we think that’s the term for it anyway!

Their argument goes something like this:

The US and UK have a more widespread population base spread across many cities.

The US and UK had a property crash.

Australia has a greater proportion of people living in just a few major cities.

Australian property prices didn’t crash.

Therefore this is – another – reason Australia’s property prices are sustainable.

As far as we can see that’s as far as they’ve gone with the analysis.

But if that’s their logic then you could just as easily use the following equally invalid logic:

The US and UK do not play Australian Rules Football.

The US and UK property markets crashed.

Australia does play Australian Rules Football.

The Australian property market didn’t crash.

Therefore, Australian Rules Football is the reason the Australian property market didn’t crash.

What would you say to someone who served up that logic? You’d laugh them out of town. Yet RP Data makes a similarly unfounded claim about the connection between Australian property and the dwelling concentration in a few cities and it’s lapped up as fact.

The RP Data theory is nothing more than circumstantial evidence. In fact I’m not sure it even deserves the tag “evidence.” It’s nothing more than a guess.

They’ve mixed up casual with causal. Just because there’s a casual relationship between the two, doesn’t mean there’s a causal relationship.

Even so, we’re sure to see Reserve Bank of Australia deputy governor Ric Battelino rely on it as evidence in a future speech.

Perhaps if the guys at RP Data and Rismark spent less time spruiking the biggest bubble in Australian investment history and more time doing some real research they’d figure out there’s only one reason why Australian property values have remained high.

And that’s entirely due to the overextension of credit.

Reduce your debt to increase your debt!

If you want more proof of that, take a read of this pap from The Daily Telegraph: “Resi Mortgage Corporation head of consumer advocacy Lisa Montgomery said a high credit card limit reduced the amount a financier would lend to a borrower.”

The article goes on to say, “Ms Montgomery said reducing credit card limits before shopping around for a loan could mean the difference between tens of thousands of dollars on what could be borrowed…”

Got that? Get that credit card limit down by a couple of grand – even if you’re not using it – and you could get yourself into debt by an extra “tens of thousands of dollars.”

Thanks for the financial advice Ms Montgomery. It’s obviously why in a more recent interview, Ms Montgomery has suggested borrowers start shopping around to refinance their mortgage.

In the article she claims “some borrowers [are] feeling frustrated at an absence of empathy from their lender.”

Sorry, what was that? Could you say that again? I’m a little bit deaf. Did she really say “an absence of empathy from their lender”? Blimey, and we thought we hit the sherry hard over the Christmas break.

Ms Montgomery doesn’t explain why borrowers would need “empathy” from a lender, so let’s see if we can figure it out.

When you’re applying for a mortgage are you looking for low interest rates, super high leverage, or… empathy?

We’ll take a wild guess at this one and suggest empathy is fairly low down on the list of priorities for borrowers. Especially when borrowers are keen to jump onboard the property ladder before prices take off to Jupiter – forget the moon, they’ve gone way past that.

Not when there’s fifty gabzillion dollars of government bribes to get their hands on.

How to borrow more without really trying

So could it be that borrowers are suddenly demanding “empathy” because they’ve figured out they’ve been suckered in to an unaffordable debt trap?

Could it be that borrowers took the advice of Ms Montgomery and others of the same ilk, and reduced their unused credit card limit from $5,000 to $2,000 so they could borrow an extra $11,000 to buy an overpriced house?

Borrowers don’t want empathy from a bank. Not unless they’re scared out of their wits that they’re going to get thrown out on the street.

Borrowers want to borrow as much money as possible so they can leverage themselves up to the biggest debt against some of the biggest houses in the world. Because the bigger the debt, the bigger the return – that’s right isn’t it?

That’s how it goes. That’s what the banks and property investors will tell you anyway.

By the way, you can check the “How much can I borrow?” calculator at ANZ’s web site and you’ll see for yourself that dropping your credit card limit from $5,000 to $2,000 gives you an extra $11,000 of borrowing power – based on the average income of $62,000.

Let’s not kid ourselves on this. The Australian property market hasn’t expanded to this massive bubble due to a housing shortage or an immigration glut.

And it certainly has nothing to do with the Australian property market being “different.”

There’s one thing that’s caused the bubble to expand. And you don’t need to be a Princeton professor to work out what it is – credit.

It’s as simple as that.

And just as it was credit that caused the property bubble to expand, it’s credit that will cause the bubble to pop. And pop in a big, big way.

You can bet your house on that!

Cheers.
Kris.



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