By David Hargreaves
I don't mind if people don't always believe things I write.
I do, however, have cause for concern when I have difficulty myself believing something I write.
This was the problem in front of me when I reported on the latest Real Estate Institute figures for March.
The information from REINZ said that annual house price inflation had risen, just in the past month, to 9.2% from 8.2%. Now, I'm not saying that didn't happen. Because I don’t know. It's just that my gut instinct tells me there's no way it happened.
Remember this information came out in the same week that the Government valuer, Quotable Value, reported that house price inflation on an annual basis had fallen in the past month to 8.8% from 9.3%.
Confusing? You bet.
So, it was with something approaching relief that I read Westpac economists’ latest Home Truths publication, which stated with refreshing candour: "It is impossible to tell what is really going on with house prices."
However, my relief should be other people's discomfort.
Impossible to tell what is really going on with house prices? Really? Oh, dear. Is this ideal?
We seem to have placed ourselves in an interesting position here.
A juggling act
On the one hand at the moment there is a big requirement for timely house price inflation information, largely because the Reserve Bank has put in place its ‘speed limits’ on high loan-to-value lending and we need to measure what impact these are having.
But on the other hand big question marks are appearing over the veracity of some house price information, er, because the Reserve Bank’s ‘speed limits’ on high loan-to-value lending are doing really weird things to the housing market...
Yes, that’s right. We need information in order to measure the impact of LVRs - and the LVRs themselves are putting the spanner in the works regarding effective collation of such information.
Now, the REINZ might argue with me, and say that its figures are painting an accurate portrait of the current market. Only a few months more worth of data might really prove that point.
But whatever the view, there’s no question that measuring house price inflation has always been a pretty vexed issue.
Try cornflakes
If you want to measure how much the price of cornflakes is going up, buy a packet one month and then buy another packet of the same brand the next month. Then compare prices. Easy.
But houses? A similar method of pricing comparison would only really work if you sold the same house in the same street every month. Otherwise it’s never truly comparing apples with apples. The composition of house sales is never going to be the same month by month, so trying to establish some sort of coherent pricing trend is always problematic.
In New Zealand we have two main sources of house price information: REINZ and QV.
In basic terms the difference between the two is that REINZ records house sales the minute an offer goes unconditional, while QV records transactions at settlement and compares the price attained against valuation.
Based on the methodology it could be reasonably expected that the QV information would be more accurate, not least because it's based on a final outcome, IE the finished sale. The trouble is, because it records transactions only at settlement, its information tends to ‘lag’ by around two months.
When the market is really heating, as it was in Auckland last year, there are some months when the QV information really doesn’t reflect what’s happening on the ‘street’ right then and there.
Hot hands
Which is where the REINZ information comes in. It’s hot from the estate agents’ hands and it measures a sale as soon as an offer goes unconditional. Which means, of course, that it's very timely.
Personally, I’ve tended to prefer the REINZ data as offering an insight into the real market mood of the moment.
But then came the LVRs…
As if it wasn’t difficult enough to compare house sales on a month by month basis, suddenly there’s a new regulation that completely skews house buying trends.
Because so many first home buyers have currently dropped out of the market, the number of houses sold at the lower end of the house price range has dropped, sharply.
In its latest release REINZ said that while the total number of sales for March 2014 was down 10% compared with March 2013, the number of sales below $400,000 fell by 21.9%. This followed a fall in sales below $400,000 of 17.7% between February 2014 and February 2013.
What this means is that the ‘normal’ range of prices from nought to whatever has been totally skewed, because the low end has been artificially knee-capped due to a new regulation.
A nightmare on Auckland's streets
This further means that calculating the average and the median prices becomes a nightmare.
Remove the bottom end of the price range and obviously both the average and the median prices move up considerably – but does that mean that prices have really risen, when what’s really simply happened is that a whole section of the market has been taken out?
The REINZ Monthly Housing Price Index (HPI) is, in REINZ’s own words, calculated using a technique known as stratification, which provides an averaging of sales prices for common groups of houses.
“This approach is considered a more robust analysis of actual house price trends and was developed in conjunction with the Reserve Bank,” REINZ says.
Well, “more robust” or not, I agree with Westpac chief economist Dominick Stephens that “in the current circumstances the HPI may have been skewed”.
As stated earlier, another few months of sales figures will help tell whether that is the case.
Where are we?
But, disappointingly, it appears that at the moment we are struggling for timely information that tells us exactly where the housing market is right now.
Is house price growth easing as QV’s figures suggest? Or, are those QV figures picking up what happened two months ago – IE an easing – which has now been overtaken by another wave of price rises? Are the REINZ figures, despite what I may think, actually showing a genuine new surge of house price inflation?
I really don’t know. And it would be nice to know.
I wonder if the RBNZ had any idea of the difficulties its LVRs would cause in measuring house price inflation.
The situation seems truly ironic - when one of the aims (though the primary aim was financial stability) of the LVRs was to take some heat out of house price inflation. So, introduce a measure to curb house price inflation and then not be able to gauge house price inflation because of the measure you've just introduced...Interesting, to say the least.
Do you believe?
Right now probably most people are inclined to believe (if we accept QV as more accurate) that the LVRs have put the dampener on house price inflation, but we’re not absolutely certain!
So, the question is, do we have a better “more robust” way of monitoring house price inflation available? And, no, dear reader, I’m afraid the question is not rhetorical. I don't know; it’s a genuine question.
Maybe an LVR-specific house price inflation measure can be developed. Maybe somebody should have thought of that first. Or did the RBNZ not realise the extent to which its LVRs would kill off the bottom end of the house market, however temporarily?
But it may be the RBNZ will be happy enough with the QV figures, slight time lag and all, which are suggesting an easing in house price growth.
To my mind, however, it’s not a particularly satisfactory situation.
8 Comments
Hard to know exactly how REINZ do their 'stratification'; they don't go into details on their website.
If they group houses by suburb and calculate a median price change for the suburb and attach a weight to that data proportional to the population of the suburb (so each suburb represents the same proportion every month, all weights suming to 1), then it can still easily be skewed by the LVR's.
Within any suburb, if due to the LVR's only very expensive houses are selling, then the REINZ index will be increasing.
With QV, the index only increases if properties are selling for more and more above GV. So if only expensive properties in each suburb are selling, but are not selling for any more above GV than they were last month, then the index won't increase.
I have always liked the QV index the best. The main weakness obviously being when people add value to the property and don't get GV updated then sell for miles above GV giving a false impression that properties in that area are going up in value.
Be good to get more details on how REINZ do their stratification though
Some of us did warn that LVR;s would create distortions and yet this information fell on deaf ears.
Maybe the confusion that is occuring will be a good thing as it may return the market to valuing based on fundamentals rather than the paying for fat steers but buying weaner calves approach.
Surely if LVRs have killed off the bottom end of the market, it is not likely to be owner-occupier FHBs - as they can still apply for Welcome Home loans with a 10% deposit.
What it likely has killed off are the multi-property non-owner-occupier buyers who can no longer put 0% down based on equity held in other properties in their portfolios. Hence, less competition at the low end for the owner-occupier FHBs.
Or are rental investors still allowed under the LVR regime to gear up to their eyeballs based on unrealised capital gains?
The bottom end of the market was already killed off.
When median multiples inflate, the bottom end of the market is cut off.
When median multiples are 3, there is a good reason that this is regarded as a natural, market driven level of affordability. Every income level has housing available at around 3 times its own income. Even someone on $30,000 can find something for $90,000 (or a rental equivalent).
When the median multiple is, say, 6 - the home that WAS $90,000 is NEVER just $180,000. The inflation is highest at the bottom end of the market, because it is all in the raw land values. The $90,000 home was literally a $50,000 structure on $40,000 worth of land. When "house prices double", it is actually LAND prices increasing TENFOLD OR MORE.
The BOTTOM end of the market moves up from $90,000 to $300,000 - and the $300,000 cheapest option is always in a LESS efficient location than what the $90,000 one WAS.
It is deeply disappointing that the many people who claim to care about the people at the bottom of society, don't want to engage with these realities.
At higher income levels of society, homes that WERE bought by lower income level people get bought by the higher income people instead, while land space trade-offs frequently enable higher income people to cope simply by accepting a mansion with a couple less rooms, on 1/4 acre instead of 1 acre, for their $2,000,000+ budget. Disproportionate sacrifices are made by the people at the bottom, who have to make do with a broom closet instead of a small townhouse or a Victorian era "handyman's dream"
If it is LVRs impacting, then there should be other secondary affects- Off the top of my head, disproportionate build up of "lower stratification" inventory while the upper stratification is still ticking along as before.
But there is a horrible lack of clarity over the entire area, so we are reduced to questions of "how has the outcome of this very opaque measure changed since earlier days"
From my experience, I would not believe any figures quoted by the Real Estate Institute.
It is their job to talk up the market. Even if the market is tanking, they would put a positive spin on it.
QV, on the other hand do not have a vested interest in the market.
I notice mortgage rates have gone up, but could someone tell me why term deposits have not moved?
Bank magins have increased, but no one seems to have noticed it!
In my experience with a relative of mine; A lot of people are completely unware of the welcome home scheme. If they bank with ASB, BNZ, ANZ, which covers a large portion of potential FHB's then they get told they need 20% dep and thats it. They certainly do not get pointed away to a rival bank that offers the welcome home loan. I had a relative trying to buy his first home in pn recently, he was content with the fact that he could only afford around 200k after using his kiwisaver (he struggled to save much like most younger people who tend to spend anything that have sitting in the current account). He was under this impression for at leat a year and was actually trying to save a deposit, but had a big new years, as ya do, and bascially back to sq one this year. I told him to go to westpac (first said kiwisaver and he though they were for poor people for some reason and didnt want to go there), and within 1 month he brought his first home for close to 300k, which in pn is very nice, better than anything his parents had ever been able to buy. Hes got a flat mate to help pay mortgage and has to lock away money vua principle payments every pay week so is forced to save. I am certain that buying this house was his best ever financial decision. If you take inflation into account, he has paid $50k less than if he had brought back in 2006 (7 years of consolidated, flat prices since then in pn while wages and rents catch up), and even if he chooses to move has something that can be rented to cover both interest and principle, so has house paid off for him. Yes this is p.n and not auckland, but in many regions with farming underpinning growth now is a very good time to buy
So its not always easy to understand how home buyers think and act. Most are not and never will be present on interest.co.nz or do their own research other than looking at a friends new house and wanting something better.... They can be very easily manipulated by banks, and its almost an ethical or moral issue that BNZ never made him aware of the welcome home loan earlier.
If I was a real estate agent I would give clear directions (with pictures!) on how to access the welcome home loan, and frame it in a way that didnt make it seem targeted to 'poor' people, but simply as a way of getting around the 'rules'.
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