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House Prices and the Illusion of Certainty; Parsing the April house price data
Topic Started: 30 Apr 2012, 03:20 PM (2,584 Views)
miw
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1 May 2012, 10:33 PM
I guess you have to choose A timeframe. I also have spent a fair amount of time in the last 15 years not residing in Australia.

I don't really think of myself as a bear, more as a realist, but I guess in the new world of absolutes, if you are not a bull, you must be a bear.

In fact, more than a realist, I am probably a bargain hunter. I never understood why people become more eager to buy as the price goes up. In every other facet of their life, they wait for the price to come down.

They don't wait for televisions to increase in price to start buying.
They don't wait for cars to increase in price to start buying.
Why do they get so giddy to buy when house prices are going up?

The answer can only be that they believe that the price will continue to go up forever. Why do actual work when all you have to do is borrow money and then receive free money for ever?

Surely this defies the laws of physics. One cannot patent a perpetual motion machine, but you are free to disseminate it's equivalent in the form of a belief in never ending and perpetual capital gain. There should probably be a law against even saying that houses always go up, because it's an obvious fraud.

And now the RBA has lowered interest rates, because the property industry and the speculators and the loan originators want to do what every degenerate gambler in history does when they are losing. They double down. But unlike the degenerate losers that inhabit the Star Casino, who can only lose everything they own, the current crop of degenerates want to use my taxes, and their children's taxes, and my childrens taxes borrowed from the future, just for one last roll of the dice, one last spin at the table. Anything to get that dopamine rush back in their head, just like the first free money they made in the property market.

So, I wait. There will be some kind of reversion eventually. Of course, unemployment might be at 25%, inflation at 22% and my job will require me to say 'Xie xie, ke ren' a lot when it eventually arrives, but arrive it will. Who knows, I may even be a buyer, if the price is right. ;)
"Bears make money, Bulls make money, Pigs get slaughtered"

This is a very common saying among traders. What it means is that some people are good at playing the market in one direction, others are good at playing it in the other direction. There are some that are good at playing it in both directions. But the people who don't do their homework and just pile onto a trend too late always get killed. Like the people who bought Apple at $644 when it was already fairly obvious the institutions, for the time being at least, were in distribution mode.

In terms of "Why People are more eager to buy as the price goes up."

There is another saying - "never try to catch a falling knife." What it means is that prices can keep falling even when you think they have fallen much further than they should. Picking the bottom of the market is actually impossible, just as picking the top of the market is impossible.

What you *CAN* do is do your fundamentals research to find something which you think is undervalued compared to the rest of the market. Then wait for it to turn, and when you are confident it has turned, buy it. In other words, buy on the way up.

Another strategy is to wait for something to make a new high and then jump straight in then. Not when it is 40% above its previous high, but when it is 1% above its previous high. This is because there is a corollary to the previously stated rule that prices can keep going up longer than you can believe they will keep going up. This strategy is called "Buy High and Sell Higher" and many traders do very, very well with it. Once again, do your fundamental research to check out that there is actually a return driver, though.

For example, applying these two rules to your potential upcoming gold purchase:

Right now the USD gold price is in a downtrend, and below both the 50-day and 200-day average price. However, it is consolidating into a narrow range and might be ready for a breakout. Most people would be uncertain as to the direction of the breakout, although I would give a slight bias to upside. What I could say, however, is that if it went above its 200-day moving average (US$1650) then it would be a new trend, and it would be an upward trend. So if I were bullish on gold, or even if I had a long-term trend-following strategy on gold, I could set a buy order that would not get triggered until it hit $1650, and a stop-loss at the bottom of current consolidation ($1577) just in case the breakout turned out to be a bull trap. If it dropped back to that level then I would know I was wrong, and the sign of a good trader is probably more about how quickly they cut their losses when they are wrong than how often they are right.

That would be the first strategy.

If I were a devotee of the second strategy, I would wait for it to exceed about $1860, which is the 3-year high. I might have to wait a long time for that, but I'd almost certainly make good money on the trade when it came.

point is, for either of these strategies you have to wait for strength rather than trying to pick the bottom. Probably more so for housing, since it is hard to have a stop-loss. I look forward to the day when they sell options with the RPData-Rismark index as the underlier, then at least it would be possible to buy a put option and hedge your bet long enough to get out if things went really sour.

Personally, I think trying to predict the markets is a mug's game. Fortunately you don't have to. If you can just work out what the current trend is, you can make a profit. But that is not always as easy as it sounds.


The truth will set you free. But first, it will piss you off.
--Gloria Steinem
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It's after 11PM, so I will return to this tomorrow :)
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"Bears make money, Bulls make money, Pigs get slaughtered"


There's another trader saying that's quite common:
"Pigs rush to the trough when there is food, but squeal when they get slaughtered."

What we are seeing now in the property market is the start of the squealing.
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Parsing the April house price data

So we have a bunch of house price data out today. The ABS’s quarterly median detached house price index, which was published at 11.30am this morning, claims that capital city prices across Australia fell 1.1% in the March quarter. Confusingly, Australian Property Monitors (APM) reported a 0.9% increase in detached house prices over same period (but with a notably smaller +0.1% rise in the price of units). And APM and the ABS apparently use similar “stratified median” index methodologies.

In contrast, RP Data-Rismark have recently launched a radically different, and much more sophisticated, “hedonic” house price index technique that tracks changes in the value of the overall housing “stock” rather than simply the transactional sales “flows”. Only about 5-6% of the housing stock turns over each year, and these transactions can be an imperfect representation of the 95% of homes that do not trade.

RP Data-Rismark’s eight capital city “all dwellings” index, which includes both houses and units, registered a flat (actually up slightly) result over the first three months of 2012. Yet when we look at the detached house sub-series values declined by 0.1% over this period (units were up 0.9%).

Aggregating across the three major indices—with one up, one down, and one flat—one might reasonably conclude that home values were mostly unchanged during the quarter. This makes sense given that the RBA’s two rate cuts in November and December arguably helped galvanize an improvement in housing conditions over the first quarter of 2012.

A crucial rider to this is the fact that the banks have over February and April taken 50-60% of the December rate cut back. Beyond reducing the stimulus that the RBA’s rate relief would have otherwise injected into the economy, these independent pricing decisions by the banks—justified or not—have undoubtedly created substantial confusion in the minds of consumers in respect of the future level and direction of lending rates.

Today RP Data-Rismark also reported their results for the month of April. On a month-on-month raw basis, dwelling values across Australia’s eight capital cities declined by 0.8%. This movement is highlighted in the first chart below, which shows the daily index changes over the month of April. The second chart stretches this data back to the start of 2011 using a one week moving average.

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What is especially interesting is that 100% of the decline experienced in April occurred in the second half of the month. Whereas over the first 14 days of April Aussie home values followed on from the trend set in February and March, yielding a small capital gain based on RP Data-Rismark’s method, they slumped by 0.85% in the second half of the month. What could have caused this dramatic intra-month change?

One possible explanation is the intervention of Easter, which saw a sharp decline in auction and private treaty sales activity over the period 6 through 9 April, inclusive. This does not, however, shed light on the adverse price action that really began on the 16th of April.

A likely more powerful explanation is the fact that one of Australia’s largest banks, ANZ, lifted all of its variable mortgage rates by six basis points on Friday the 13th of April, which triggered a tsunami of negative media coverage and speculation that other banks would follow suit. This coincides perfectly with the inception of the price falls on Monday the 16th of April.

There are two other factors that probably contributed to the malaise in the last few weeks of April. The first is the fact that the RBA had said for months that it would not cut rates unless it received a “benign” inflation print when the first quarter inflation data were published on the 24th of April.

Once again, there was a great deal of media coverage speculating on the impact different inflation figures would have on the RBA’s policy decisions. As it transpired, the inflation data printed low, and the debate shifted to the size of the RBA’s cuts as opposed to whether we would actually get a cut.

In parallel there has also been an animated public debate swirling around the impact, if any, the Gillard Government’s austere budget settings would have on the RBA’s decisions. The composition of the budget will not be revealed until the 8th of May, which has led some to suggest the RBA will book-end its rate cuts either side of this event (ie, in May and June). The alternative, of course, is that they front-end load them.

It is not unreasonable to think that the unusual dynamics described above, and ANZ’s rate hike in particular, gave buyers and sellers considerable pause in the second half of April. In the event that the central bank judges that lending rates should indeed be pushed one quarter-to-one half of a percentage point lower, I would expect that the 2012 consolidation in housing conditions will firm up further.

In this context, it was comforting to see the RBA report yesterday that Australian housing credit is expanding at a pace consistent with the growth in disposable household incomes (ie, over 5% per annum), as I’ve long argued should be the case here.

Read more: http://christopherjoye.blogspot.com.au/2012/05/parsing-april-house-price-data.html
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"Bears make money, Bulls make money, Pigs get slaughtered"

Yes, but Pigs also vote.
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There is another saying - "never try to catch a falling knife."

I find that a very poor metaphor. No one tries to catch a falling knife. A, it falls straight down, and B, it comes a complete stop when it hits the ground. I think a better metaphor would be "Never chase a golf ball rolling down a hill. Watch it and see where it stops."
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Picking the bottom of the market is actually impossible, just as picking the top of the market is impossible.

I don't need to pick the bottom. If prices fall far enough, then at some point the mortgage repayment and the current cost of my rent will converge. At that point it's a no brainer. I get the property, for the cost of rent. It doesn't matter how much the price goes down after that, because it's irrelevant to me.
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What you *CAN* do is do your fundamentals research to find something which you think is undervalued compared to the rest of the market. Then wait for it to turn, and when you are confident it has turned, buy it. In other words, buy on the way up.

Except for dead-cat-bounces, those catch a lot of suckers.
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Right now the USD gold price is in a downtrend, and below both the 50-day and 200-day average price.

Paper gold is a strange market. In the last 5 years, you could make money simply by being long at the open and short at the close. There are players in the gold market who don't really play by the rules.
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and the sign of a good trader is probably more about how quickly they cut their losses when they are wrong than how often they are right.

Soros 4 laws of trading.
1. Let profits run.
2. Cut losses short.
3. Buy low.
4. Sell high.
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I look forward to the day when they sell options with the RPData-Rismark index as the underlier, then at least it would be possible to buy a put option and hedge your bet long enough to get out if things went really sour.

The underlying assets are illiquid, so the index would have to be a synthetic, and all synthetics are susceptible to corruption and fraud. I've been trying to think of a good short for residential housing. Maybe bond options. I don't think they are exchange traded though :(
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Personally, I think trying to predict the markets is a mug's game.

Me too, which is why for liquid assets (not property)I look at the total return, not the price. The price is influenced by so many factors, including inflation, taxation, demographics, sentiment, fraud, mania. The total return is pretty easy to calculate though.
Illiquid assets are a different matter. The investor is supposed to be paid for taking a risk, and in illiquid assets, the biggest risk is the liquidity (or more precisely, the lack thereof). In illiquid assets, I am price sensitive as well as return sensitive.
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miw
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I don't need to pick the bottom. If prices fall far enough, then at some point the mortgage repayment and the current cost of my rent will converge. At that point it's a no brainer. I get the property, for the cost of rent. It doesn't matter how much the price goes down after that, because it's irrelevant to me.


Fair enough. Although there has only one time in my life when mortgage repayments on a 90% LTV loan was less than the rent on the equivalent property. Not sure it wil ever happen again. But you could always pick a mark like a 75% LTV loan or whatever. The concept is sound.

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Except for dead-cat-bounces, those catch a lot of suckers.


Yeah. There is almost always a bounce after a big fall, some say it is due to all the shorts taking profits and covering. It is usually not too hard to avoid those. Many of them look like what is known as a "bear flag" which is signal for short rather than long. Also, most significant price movements have at least 2 phases, and probably 3.


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Soros 4 laws of trading.
1. Let profits run.
2. Cut losses short.
3. Buy low.
4. Sell high.


Agree with all of these except 3. Because you don't ever actually know what "low" is.
Buy when there is blood in the streets. Buy when the dumb money is very bearish. Sell when the dumb money is bullish. Right now this forum suggests that property is a screaming buy because even the bulls are nervous. :-)
1 and 2 are absolutely correct, and so, so hard to make yourself do.

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The underlying assets are illiquid, so the index would have to be a synthetic, and all synthetics are susceptible to corruption and fraud. I've been trying to think of a good short for residential housing. Maybe bond options. I don't think they are exchange traded though :(


Yeah. Australia has absolutely no Residential REITS. Just commercial property shops like MIRVAC and Westfield. I am not so worried about the corruption and fraud with synthetic indexes. But I do worry about counterparty risk and tracking error. The underlier would have to actually be index futures rather than the index itself, which means you lose bigtime when the futures are in contango and of course in most cases it would be an ETN rather than an ETF and I won't touch ETNs because of the counterparty risk.

Mitre-10 is stuck in with IGA now isn't it? Not pure play....

Consumer discretionary/retail shares might be about as good a proxy as you can get. I guess a big property crash would decimate the shares of the banks so you might be able to insure against the nuclear option.

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Me too, which is why for liquid assets (not property)I look at the total return, not the price. The price is influenced by so many factors, including inflation, taxation, demographics, sentiment, fraud, mania. The total return is pretty easy to calculate though.
Illiquid assets are a different matter. The investor is supposed to be paid for taking a risk, and in illiquid assets, the biggest risk is the liquidity (or more precisely, the lack thereof). In illiquid assets, I am price sensitive as well as return sensitive.


I find myself being very price-sensitive on anything where I am looking for a total return rather than a trading gain, liquid or not. Typically you are looking for a long-term hold and let compounding of reinvested dividends do their magic. A 30% retracement can be a real drag here as well. :(

I would add one more law to the Soros 4 laws of trading:

5. Fear the market.
The truth will set you free. But first, it will piss you off.
--Gloria Steinem
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But you could always pick a mark like a 75% LTV loan or whatever. The concept is sound.

That's about the line I am thinking of. 70-80% LVR and repayment/rent ratio under 1.2, preferably 1.1. Then I get both outcomes. Ownership at minimal increasing in outgoings.
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Agree with all of these except 3. Because you don't ever actually know what "low" is.

3. Maybe, buy lower than you sell.
4. Sell higher than you buy.
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Right now this forum suggests that property is a screaming buy because even the bulls are nervous. :-)

You go ahead, I'll take the other side of that trade. :D
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1 and 2 are absolutely correct, and so, so hard to make yourself do.

Anything that requires uninterrupted vigilance is extremely difficult to do. Dammit. :(
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But I do worry about counterparty risk and tracking error.

Tracking error, corruption, potayto, potahto.
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Consumer discretionary/retail shares might be about as good a proxy as you can get.

It's a brave man that takes a short position against Gerry Harvey, but JB HiFi looks like they are suffering serious margin compression right now. Volume is up, but profits are down. Always a good sign of stress.
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I find myself being very price-sensitive on anything where I am looking for a total return rather than a trading gain

To clarify what I meant, I am less price sensitive on liquid assets because I can get out of them so quickly. Two minutes later if I so desire (on deeply liquid assets). This makes the cost of getting the direction of the underlying price wrong cheaper. You take your loss and get out. If you get the price direction right, and the total return is good, then getting the best price isn't nearly as good as getting a good return. It sure beats a negative return.
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A 30% retracement can be a real drag here as well.

Sure, but liquidity is a wonderful thing if you are prepared to give up holidays :)
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I would add one more law to the Soros 4 laws of trading:

5. Fear the market.

The market can be wrong a lot longer than you can.
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RBA analysis of housing market: soft prices + strong rents

The RBA's analysis of the housing market is pretty straightforward. The slide in prices is slowing, with APM notably suggesting that there has been no movement in prices over the last six months (RP Data-Rismark are weaker, although we were also flat over Q1 in raw terms). At the same time, the national rental vacancy rate is very low by historical standards at around 2%, which is driving strong, above-trend growth in absolute dollar rents. The RBA specifically comments:

"In contrast to dwelling prices, the various measures of rents grew by 4 to 5 per cent over the year (Graph 3.7). Reasonably strong rental growth, together with falling dwelling prices, has lifted rental yields to around ½ percentage point above their mid-2000s level. Rental vacancy rates have been around 2 per cent since 2009, above the very low levels seen in 2006–2008 but still low by historical standards."

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