RP Data’s Tradeable Australian House Price Index

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RP Data has just released a daily index of Australian house prices which is designed to be tradeable on the ASX. I expressed my scepticism about this product on PM last night (the audio is below; the transcript is available here).

Steve Keen's Debtwatch Podcast

 

The many hedge funds that have been looking for a way to short the Australian property market now have a vehicle. Of course, I would suggest careful assessment of the counter-party risk before taking advantage of it!

About Steve Keen

I am Professor of Economics and Head of Economics, History and Politics at Kingston University London, and a long time critic of conventional economic thought. As well as attacking mainstream thought in Debunking Economics, I am also developing an alternative dynamic approach to economic modelling. The key issue I am tackling here is the prospect for a debt-deflation on the back of the enormous private debts accumulated globally, and our very low rate of inflation.
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18 Responses to RP Data’s Tradeable Australian House Price Index

  1. hatless says:

    Surely the biggest issue with the index is the lack of fungibility of houses. The index implicitly puts every property in existence into one of those on-line valuation tools based on number of bedrooms, suburb and if it “has a view”.

    Who in their right mind would invest on the basis of such a subjectively-based index?

    The only analogue I can think of is basing an index off ratings agency data. Now don’t they have a great reputation for transparency!

  2. Greg Wood says:

    Considering house prices more generally, what capacity might foreign investment in housing stock have to counterbalance price decline consequential to de-leveraging the domestic mortgage debt?

    The point was made to me that, due to population growth, rents aren’t falling and a 2-3% return on investment is an acceptable result, regardless of capital gain, to offshore investors who are either cashed up or who are accessing funds at 0-1%

  3. Daniel Scollay says:

    Hi Steve,

    Been reading for a while, just signed up today so I can comment. I enjoy reading your work.

    Regarding this new service, it does seem like the perfect vehicle to short the Aussie property market. Serious spruikers can now push the “buy now or miss out forever message” while simultaneously shorting the market. Make money on both ends….smart.

    Question: Do you anticipate that median house prices will rise slightly in the next couple of months due to the FHOG being taken away?

    My thought was that a decent percentage of sales last year were made up of people using the FHOG for properties between $300k-$600k. Now the punch bowl has been taken away, do you expect a lower amount of buyers in the low end of the market? I would think even though big discounts are happening at private treaties and auctions, the overall data group will be higher with the absence of first homebuyers price range of properties. Thoughts? Could be something for the spruikers to beat their chests about for the next few months.

    Also of interest was a newsletter from a real estate company that specialises in managing rental properties for investors that was in my mailbox this week. They had a big piece on the Real Estate Institute of Australia (REIA) about president Ms Pamela Bennett lobbying the government on the following:

    * Retention of current arrangements for negative gearing of property investments.
    * No Capital gains taxes on the family home
    * No increase in Capital Gains tax on property investments
    * Removal of stamp duty on property transactions
    * An increase in the First Home Owners Grant

    Quotes from Ms Bennett:

    “Another extremely important issue for the housing market is the current level of the FHOG available to first home buyers. Introduced in July 2000, the grant is one of the most important housing policy instruments in assisting first home buyers with housing.

    “The lack of financial assistance to first home buyers is an issue that requires considerable attention to ensure that property is affordable for young Australians and that they can one day aspire to own a home. REIA urges the Government to not only retain the grant but to review the amount currently provided as the relative size of the grant has declined markedly in relation to house prices”

    These quotes are quite outrageous IMO as everyone knows including REIA that the FHOG is the vital cog in keeping the ponzi that is the Australia property market going. The disgusting part is the scheme actually does the direct opposite of its stated intention in continuing the bubble making property further out of reach to young Australians.

    Is there a site/organisation that will counter the lobbying of the Real Estate industry on these vital issues?

    Finally I thought Kevin Rudd’s speech when announcing his leadership challenge was actually quite telling. The dramatic nature of the whole issue meant that some dirty laundry was aired. What raised my eyebrows was when he said in the speech that the world is going to have the next GFC. This was not the usual babble about Australia’s fundamentals and positive economic future.

  4. Steven Shaw says:

    Good point about the subjective index, Hatless. It also seems pretty odd to be overly interested in an extra bedroom when it seems to be the price of land that mostly determines the total price. In my area, land prices have done a x6 since the late 90s, whereas an equivalent build seems to be only about x1.5 (the build used to cost about twice the land cost, now the land costs about twice the build).

  5. Greg Wood says:

    Re the 6x increase in land cost, development costs haven’t gone up nearly that much. Developer’s have been making a filthy fortune.

    And with that they continue to lobby for reduced infrastructure costs, stamp duty etc., so as to make land more affordable. As though their final product is marketed ‘cost plus’ rather than for the best price achievable in the market. Disgraceful that they’re let get away with it. Where is the public media on this issue – in narcosis?

  6. Frank says:

    A quick glance at the links suggests that it is just a statistical index – not tradable. Where is the tradable aspect of it? I can’t see it.

  7. David Colquitt says:

    Steve, with all these type of products beware the couterparty risk. We need look no further than the collapse of MF Global. I know lots of people who had in the money positions with MF Global but when the broker can’t pay the games up!

  8. RickW says:

    @Frank

    The index is not yet being traded:

    http://www.propertyobserver.com.au/residential/new-daily-index-shows-aussie-home-values-rose-0.8-in-february-christopher-joye/2012022953635

    quote 1st March – ASX product development manager Brian Goodman said today that the exchange is investigating “the creation of exchange-traded products with the objective of allowing investors to replicate the performance characteristics of Australian residential property. The ability to obtain and optimise residential property exposures with an exchange-traded product will enable investors to efficiently manage exposure to this asset class.” end quote

  9. Steve Keen says:

    Hi Daniel,

    I think we do need an organisation to counter the property lobby’s attempt to have the FHVB extended, and I’d be happy to be part of that. At present Prosper Australia probably leads the campaign against such influences:

    http://www.prosper.org.au/

  10. Steve Keen says:

    This is an issue Greg,

    But it can cut both ways when a price fall sets in. Foreigners can suffer twice then–via falling prices and a falling exchange rate. This is what happened to Japanese speculators on Australian land prices after the 1990s bust.

    However the additional wildcard is wealthy Chinese buying not for economic reasons but political insurance against events turning sour in China.

    This issue definitely clouds the otherwise clearcut Ponzi aspects of our real estate bubble and burst.

  11. Greg Wood says:

    Hi Steve
    My previous question was framed generally but I did particularly have in mind the activity of Chinese and Indian investors.

    Foreign money from other sources tends to invest in new development projects, thus still needing domestic mortgages to purchase finished product. However there seems to be a notable trend of wealthy Chinese and Indians investing as landlords. My wife consults with people who are behind in their utility accounts. The number of her low-income clients renting from Chinese or Indian landlords seems to be disproportionate to what one might expect. This random sampling indicates instances of this investor class owning whole streets and blocks of houses.

    Such consolidation of ownership might be anticipating a future re-development ambition. However the rental arrangements seem almost feudal in character and that may reasonably be considered to be the intent. Given the global financial situation its a relatively safe haven for cash that has to go somewhere.

    It certainly is a wildcard to the pure financial analysis of domestic debt levels. I have no idea regarding the residential status of these landlords, or the legitimacy of their ‘investments’ under foreign ownership purchasing guidelines. I bet the Govt doesn’t have a clue either. They’ll happily sell the farm to keep things looking ‘stable’ in the short term.

  12. alainton says:

    Surely there is a much more obvious way to short property – invest in buy to let. With interest rates going down in a property recession, rental prices going up – because of the shortage of housebuilding, and land prices coming down its a no brainer. The trick is to avoid the mortgage famine that deleveraging brings – and which killed many overleveraged BTL companies inn the UK in 2008-9, but if you arnt leveraged and your balence sheets are burning a hole in your pocket looking for a safe haven BTL is a good investment for pension funds/REITs etc. for several years of a property downswing, before switching back to equities in the upswing.

  13. alainton says:

    Of course that only makes sense after the downswing.

  14. alainton says:

    In fact the historical inability to short land – the only rational response is to increase liquidity – seems to be quite important macroeconomically.

    Imagine a situation where some ponzi investors had overpaid near the top of the market but then the rational expectations fairy comes along and everyone gets perfect foresight. Oh dear the price of housing is going to decline – we cant short that so we have to go liquid. An increase in liquidity preference leads to a collapse in aggregate demand, raised unemployment and a a fall in property prices, delveraging etc. So in this toy scenario rational expectations creates a disequilibrium process – because asset prices were so out of equilibrium in the first place.

    Now replace perfect expectation with a bell curve based on the rate of growth Near the top of the curve more people will expect growth so it will be pushed to the top and slightly beyond, after which the pressure will be downwards as more people expect decline. What this shows is you don’t need a Minsky like arbitrary triple categorisation of expectations, or unrealistic rperfectly rational expectations in the face of uncertainty to drive the housing (kunznets) cycle, just a normal curve of optimism in continued growth of land prices.

  15. Philip Sturm says:

    Wow, I’m sure glad you made this post. I signed up looking for some information on the effects private hedge funds and derivative instruments have on the debt and money systems, what with trillions upon trillions of dollars in notional value sort of just floating around in speculative space. With the creation so much “wealth” (as long as things are good), how would that impact debt activity and acceleration? Do you have a stupid-man’s blog post about the interaction of the shadow banking systems and debt creation? Thank you for your work.

  16. Philip Sturm says:

    Addendum: My rough idea of the recent crisis was that public banks were pushed into direct competition with private investment firms who were bypassing the traditional mortgage market in favor of direct mortgage origination firms. Wall St. hedge funds became the direct financial pool for financing home loans, and they, as we all know, turned around and sold those securitized derivatives to public banks, governments, pensions and so on. Since investors were looking for, above all else, ROI, public banks were losing out on investor dollars to the new-fangled financial behemoths who operated almost completely in the dark. This pushed them to open up new divisions, and of course the notorious repeal of keeping the two kinds of banking apart. So what this post is basically showing is how these hedge funds can simply bypass funding mortgage origination altogether, and play the volatility without any undue burdens of administration and origination. Great. So basically no one is going to put skin in the game and fund mortgages, and you’re actually going to have chumps betting on the upside when no one can get a loan in the first place?

  17. Steve Keen says:

    Hi Philip,

    Not a lot in detail, but I recommend watching the recent Capital Account program where the word of the day is “Rehypothecation”.

    http://rt.com/programs/capital-account/bank-bubble-blowers-rehypothecation/

  18. Amotzza says:

    Hi Steve – what a disaster we are heading for in Australia. We have identified a situation where 3 real estate agents value a property at $2m+. It has been on the market with one of them for 1 year. It is zoned rural and has been used to breed thoroughbred horses which are very difficult to sell. It is likely to be rezoned in 2013 when a freeway from Melbourne reaches it. There are no buyers for this property at any price. The property has a $700,000 mortgage. What are people to do in this situation.

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