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Home buyers duped into thinking bricks and mortar is a safe investment - Chris Joye; Are we being misled over house prices?
Topic Started: 13 Aug 2014, 12:44 PM (1,112 Views)
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Are we being misled over house prices?

Christopher Joye
12 Aug 2014

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Recently Australia’s largest real estate information business – RP Data, which spends $15 million a year collecting property data – has come in for criticism over its monthly house-price benchmarks.

A key source of the dispute was RP’s estimate of 3.7 per cent price growth in Melbourne over the month of July, because it annualises to capital gains of 44 per cent.

“Anyone watching this space over the past few months will know that according to RP Data, the nation’s property values are bounding around like a yo-yo,” one journalist said.

This debate requires several clarifications. The first is that RP Data’s hedonic home value index, which is probably the most sophisticated measure of house-price movements in the world (and the Reserve Bank of Australia’s index of choice), is not nearly as volatile as it seems.

On an annualised basis, the index volatility is only about 3 per cent to 4 per cent, which is about half the variability of the less precise stratified median price indices produced by the ABS or Australian Property Monitors (APM), which is owned by Fairfax Media, publishers of The Australian Financial Review.

Indeed, the capital cities index published by RP Data has about half the volatility of Australian government bonds and a fifth the variability of the Australian sharemarket. In the equities market, prices can jump 2 per cent to 4 per cent in a single day.

APM produces a quarterly as opposed to monthly index that competes with RP Data. It’s fair to say that RP Data’s hedonic indices have over the years taken market share from APM, which employs a simpler, but still valuable, stratified median price methodology.

The next thing to note is that the risk to which an individual home buyer is exposed is about five times greater than the indices RP Data publishes, as I have previously gone to great lengths to explain.

Put differently, when you buy a home you get one asset in one street in contrast to the about 8 million homes that underpin RP Data’s national capital city benchmark. So whereas RP Data’s index suggested prices across the nation slumped 8 per cent over 2011 and 2012, the losses within some suburbs, and on individual homes, were much steeper than that.

Super safe investment a fiction

One challenge here is that we are just not used to synthesising high-frequency housing data. Prior to RP Data launching its monthly indices after prompting from the RBA, which had for years criticised the timeliness of the old quarterly proxies published by the ABS, APM and CBA/HIA, we only received updates on price changes every three months.

This was a problem. Home buyers have historically been duped into thinking that bricks and mortar is a super-safe investment, which is a complete fiction. The volatility of an individual home, which, as I mentioned earlier, is five times greater than the national indices you see reported, is actually similar to the riskiness of the sharemarket. Few people understand this.

Yet this statement also heroically assumes you are buying a property outright and have zero leverage (or debt). Once you factor in the fact that most new home buyers are geared, on average, 70 per cent to 80 per cent, with a mortgage you find that empirically a single property is significantly more risky than shares. This would likely come as a shock to many pundits.

Read more: http://www.afr.com/p/blogs/christopher_joye/are_we_being_misled_over_house_prices_SKNQGsIVCJwAILOuohbtbM
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ThePauk
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My God, am I on the home planet?
CJ is making so much sense these days.
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Ex BP Golly
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10% make a loss before costs are included.

How many make a loss when all costs are considered.

Interest
insurance
maintainance
rates
Fees
etc.

As an owner (outright ownership) of one property, I am also a very happy renter.

I broke even on my first property after all costs (may actually have made a little money!) and bought my second place with no concern for its movement value wise.

Joye is correct, profits are not guaranteed and I certainly don't buy for that.

Property for me whether I buy or rent is now treated as a liability.
WHAT WOULD EDDIE DO? MAAAATE!
Share a cot with Milton?
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goldbug
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A dose of truth in the article alright. Property is no better an investment than the stock market, both are susceptible to boom and bust and both should be avoided at bubble tops. Like the bubble top housing in experiencing after 40 years of runup.

US property went up 50 years without a headache before the wheels fell off and were supposed to be 10 years behind US trends. That being the case were right on the 10 year cusp of their 2005/6 collapse. Food for thought...


Looks like the bulls are leaving this thread alone, as usual.
Edited by goldbug, 13 Aug 2014, 01:40 PM.
Shadow was hopelessly wrong about the Gold Bull Market.
What else is he wrong about?
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Ex BP Golly
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goldbug
13 Aug 2014, 01:39 PM



Looks like the bulls are leaving this thread alone, as usual.
It would be hard to imagine them attacking their poster boy.

BTW, anyone considered the possibility that Moops is CJ?

Now that CJ has swapped sides he no longer needs his Moops avatar to counter his efforts.

Both events occurred Ascot the same time!
WHAT WOULD EDDIE DO? MAAAATE!
Share a cot with Milton?
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miw
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Ex BP Golly
13 Aug 2014, 01:21 PM
10% make a loss before costs are included.
The thing that actually surprised me was that about half had a better than 10% CAGR.
The truth will set you free. But first, it will piss you off.
--Gloria Steinem
AREPS™
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Jimbo
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goldbug
13 Aug 2014, 01:39 PM
US property went up 50 years without a headache before the wheels fell off and were supposed to be 10 years behind US trends. That being the case were right on the 10 year cusp of their 2005/6 collapse. Food for thought...

UK property went up in a very straight line until 1988 and rising property prices were as certain as the sun coming up in the morning.

"Bricks and Mortar" was seen as a no fail investment strategy (until 1988).
Matthew, 30 Jan 2016, 09:21 AM Your simplistic view is so flawed it is not worth debating. The current oversupply will be swallowed in 12 months. By the time dumb shits like you realise this prices will already be :?: rising.
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millimouse
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Thanks for the data, very useful.

If we can get similar charts over mortgage payments, council fees, stamp duties,..., then we can be clear which interest parties share the benefits of the RE Bubble at the cost of the public.

Thanks again.
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