House prices rise sharply in July after June RBA cash rate cut despite media bias towards gloom and spin: Christopher Joye

As I expected, the RBA’s decision to – rightly or wrongly – slash interest rates to historically very low levels (the discounted rate at which most people borrow is around 6%) has had a near-immediate impact on Australian house prices. 

RP Data-Rismark’s hedonic index, which reprices a portfolio of 5 million homes using all historical sales and the incoming flow of approximately 1,500 new sales RP Data collects each day, has recorded a 1.8% increase in Australian capital city dwelling values since the end of May (refer to the blue line the chart below) to July 16. Dwelling values in Melbourne (black line) and Sydney (red line) have risen more sharply, with capital gains of 2.8% and 2.1%, respectively.

Click to enlarge

Recall that June and July are seasonally very weak months given the tapering in activity over winter. RP Data-Rismark’s daily index, which is published by both the ASX and the RBA (in its monthly chart pack), is produced in raw, non-seasonally adjusted terms since it is used as an investment benchmark. (Tradeabe financial market data are not normally seasonally adjusted.) Yet seasonally adjusting RP Data-Rismark’s index is an instructive analytical exercise, and doing so would show even stronger price appreciation than that which is displayed in the chart above. 

Over the period December 31, 2011 through July 16, 2012, inclusive, Australian dwelling values are now more or less unchanged (off -0.4%). In Sydney, dwelling values have actually risen 1.7% over the first six months of the year. And after a steep drop during April and May, home values in Melbourne have recovered quickly to be down 2.4% in 2012. This compares much more favourably with the Melbourne housing market’s -5.6% nadir reached on June 10. 

Despite the wealth of empirical evidence supplied by RP Data indicating that dwelling prices have started creeping up again in Sydney and Melbourne, SQM’s Louis Christopher has assuredly argued otherwise. (While SQM competes against RP Data, it does not actually publish a price index of its own.) 

Following the release of RP Data-Rismark’s June data, which is being directionally reaffirmed in July, Christopher issued a media release that contained several incorrect statements, which were addressed in a response from RP Data’s Tim Lawless

One of Christopher’s most surprising arguments, however, was the declaration that, "I do not believe for a moment that house prices are now rising in Sydney or Melbourne as RP Data-Rismark has claimed." Christopher has been backed up by Sunrise television host David Koch. 

Setting aside RP Data-Rismark’s findings, the REIV has separately reported that median house prices in both Victoria and Melbourne rose by about 3% in the June quarter. Averaged over the last six months, the REIV concludes that Melbourne house prices have not fallen at all. 

As I explained here, the RBA prudently leverages off multiple house price data providers since it can never be absolutely certain that the quality of any one company’s information will always remain the same. Having said that, the RBA has communicated a clear preference for the “hedonic” and “stratified median” proxies published by RP Data-Rismark and the Fairfax-owned Australian Property Monitors (APM). 

Australia is somewhat unique among OECD countries in collecting 100% of all residential sales transactions through valuer-generals and land titles offices and then making this data available to private information vendors. In contrast to the US and UK, where the most widely used indices have large sample selection biases (because they only draw on a sub-section of sales), APM and RP Data-Rismark’s benchmarks ultimately include all sales. 

To the extent Christopher genuinely believes that house prices are falling in Sydney and Melbourne, he will presumably defer to APM’s numbers, which will be published late next week. 

Christopher publicly says he “created” APM’s stratified median index, which is a point disputed by Fairfax’s APM. In its media releases, APM notes – correctly, I have been informed – that the stratified median index derives from a methodology developed by two RBA economists, Tony Richards and Nalini Prasad (more detail on the dispute between RP Data/APM and Christopher can be found here). 

The APM results should be one telling litmus test of RP Data-Rismark’s analysis. While it harnesses similar underlying information, APM employs a very different technical method. I will be personally focusing on the price action APM evidence in Sydney and Melbourne, and the national market more broadly. 

The ABS house price index data are much less useful since they completely exclude all forms of “attached” housing – i.e., apartments, townhouses, and terraces – which make up around one-quarter of the housing stock in the major cities. This is why this data is largely ignored by the RBA and most market economists. 



I want to make some final remarks on the quality of media reporting in this country. Australia’s specialised economic commentary is typically outstanding. In the wider mass media, however, there is an emerging bias towards gloom, spin, and sensationalism when it comes to covering economic topics, and housing more specifically. In an unusual move, the ordinarily very dry RBA governor, Glenn Stevens, recently drew attention to this problem in a speech, arguing

[T]he nature of public discussion [in Australia] is unrelentingly gloomy, and this has intensified over the past six months. Even before the recent turn of events in Europe … we were grimly determined to see our glass as half empty. Numerous foreign visitors to the Reserve Bank have remarked on the surprising extent of this pessimism. Each time I travel abroad I am struck by the difference between the perceptions held by foreigners about Australia and what I read in the newspapers at home.” 

The vastly experienced economic commentator Ross Gittins has echoed the governor’s concerns in an SMH column today

The conundrum is why so many people could be so dissatisfied when almost all the objective indicators show us travelling well: the economy growing at about its trend rate, low unemployment, low inflation, rising real wages, low government debt – even a low current account deficit. And yet the media are full of endless gloom… Increased competition has made the media more relentlessly negative - more uninterested in anything but bad news - which must eventually have some effect on the public's state of mind.” 

One example of the biases canvassed by Stevens and Gittins is found in the coverage of the first-quarter GDP results, which were the most significant economic news in the year-to-date. Within a few hours of the numbers being released, which literally doubled the estimates of economists (and showed the local economy expanding at an above-trend pace), Chris Zappone’s article in the Age/SMH had been buried as the number three news item under the stunningly spun headline (written by the sub-editor) More rate joy fades as economy revs up” (emphasis added).

Yes, the best economic news of 2012 had been twisted into bad news for borrowers. Seriously. And by the end of the day the article had dropped to number eight on the list of The Age/SMH's top stories behind a piece about a “bored billionaire”. The SMH screen-shot is enclosed below.

Doom-spruiker-in-chief, Steve Keen, still gets quoted by respectable media despite consistently misleading the public about the housing market. In 2008 he was regularly referenced confidently calling for a 40% fall in house prices (and double-digit unemployment).

After watching prices awkwardly rise 13% in 2009 and 5% in 2010, Keen revised his prediction to a more modest 20% decline. For what it is worth, Australian home values are currently around 15% above the lows they touched in December 2008.

At the first sign that the RBA’s monetary policy tightening was squeezing steam out of the property market in mid-2010, Keen eagerly claimed that the rate of price declines would “accelerate” thereafter. They did nothing of the sort.

Following a temporary drop in prices in April and May this year, Keen reiterated his view that the price depreciation would accelerate, and then on Twitter said he would let the data do the talking.

Well, the house price figures are talking, just not according to the tone Keen anticipated.

Christopher Joye is a leading financial economist and a director of Yellow Brick Road Funds Management and Rismark. The author may have an economic interest in any of the items discussed in this article. These are the author’s personal views and do not represent the opinions of any other individual or institution. This material is not intended to provide, and should not be relied upon for, investment advice or recommendations.


Update: SQM director Louis Christopher has tweeted a response to this column and suggests readers look at a 2005 Australian Financial Review article.

RP Data-Rismark’s house price index did not exist in 2005 when the AFR article was published, as it was not launched until end 2006.


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