Pete Wargent blogspot

CEO AllenWargent Property Buyers, & WargentAdvisory (institutional). 6 x finance author.

'Huge fan of your work. Very impressive!' - Scott Pape, The Barefoot Investor, Australia's #1 bestseller.

'Must-read, must-follow, one of the finest analysts in Australia' - Stephen Koukoulas, ex-Senior Economics Adviser to Prime Minister Gillard.

'One of Australia's brightest financial minds, must-follow for accurate & in-depth analysis' - David Scutt, Business Insider.

'I've been investing 40 years yet still learn new concepts from Pete; one of the finest young commentators' - Michael Yardney, Amazon #1 bestseller.

'The most knowledgeable person on Aussie real estate - loads of good data & charts...most comprehensive analyst I follow in Oz' - Jonathan Tepper, Variant Perception, 2 x NYT bestseller.

Sunday, 18 September 2016

Inner Sydney auctions go ape

Super-size gains?

I must confess that I generally don't find house price indexes all that useful on a day-to-day basis, and certainly for market participants they are no replacement for checking out what's happening 'on the ground'.

After all, individual experiences in markets can diverge significantly! 

Try telling an executive of BHP Billiton or Rio Tinto, for example, not to worry too much about their LTIPs as the ASX has recovered strongly since 2009 - the statement might be true, of course, but it probably doesn't feel like it it to those leveraged to the resources index. 

Nevertheless, there's an interesting story housing market unfolding in Sydney (and to some extent Melbourne) right now.

And since we know that the Reserve Bank of Australia (RBA) analyses a number of key indexes in determining its monetary policy, we should watch them closely too. 


Although I didn't get around to blogging the figures, CoreLogic - which likes to report prices in close to 'real time' - showed its home value index rising by +1.1 per cent for the combined capital cities in August 2016 to be +7 per cent higher over the year. 

The Rest of State figures were down a bit in in the month, to be flat in real terms over the past 12 months.

Notably, there were particularly strong gains in Sydney (+9.4 per cent) and Melbourne over the year to 31 August (+9.1 per cent).

The red bars on the left of the below chart show that the quarterly capital gains for both Sydney (+3.9 per cent) and Melbourne (+3.4 per cent) were particularly outsized. 

Gone ape

And now rolling forward to September the CoreLogic index has gone nuts, with Sydney's quarterly gain booming to +5.8 per cent, and the annual increase up to +11.9 per cent. 

It's now the second time this index has gone on a tear since the beginning of May.

The unusually squiggly bits on the chart through April represent the period where CoreLogic undertook a methodology change. 

In Melbourne the quarterly gain has soared even closer to the sun, with prices up by +6 per cent.

Whether or not these figures are to be taken literally and are the direct result of the twin interest rates cuts is not yet entirely clear.

The reason this is interesting - to me, at any rate - is that CoreLogic's hedonic index figures are now at odds with all of the other market indices. 

I analysed the latest 'official' ABS figures in more detail here, which are calculated based upon a stratified median price approach. 

These showed Sydney's annual capital gain slowing to +9.7 per cent, but these data lag significantly and only run to 31 March 2016. The ABS will release its figures for the June 2016 quarter on Tuesday.

Domain also uses a stratified median price methodology and reported only moderate growth in prices over the year to June 2016, despite a quarterly rebound.

Residex, which uses different methodologies including repeat sales pairs rather than new dwellings, saw Sydney's annual price growth in July slowing to just +4 per cent for houses and +5 per cent for units.

Perhaps this doesn't sound like much, but then again it still represents an annual uplift of $40,000 for the median house price, and $33,500 for units.

According to Residex since July 2012 the median established house price has increased by $393,000 or +59 per cent, and the median unit price by $215,500 or +44 per cent.

SQM's asking price index for Sydney looks to be tracking quite a bit closer to the Residex level, with growth in the +3 per cent to +5 per cent range. 

One possible slightly distorting factor here is that the booming sectors of the Sydney market include the eastern suburbs and lower north shore, where many properties are auctioned rather than being sold by private treaty.

And indeed, SQM's figures show that asking prices in parts of these sub-regions have boomed - the asking price index for units on the lower north shore is up by +55.8 per cent over the last three years, for example. 

The wrap

At the present moment CoreLogic is the outlier and looks set to report a gargantuan quarterly result for Sydney and Melbourne in September, which would be another potential headache for policy makers.

Until lately the consensus seemed to be that CoreLogic's numbers might have been overstating gains, and it did seem to be that way from the handful of suburbs that I track regularly.

But then this weekend Domain reported an enormous preliminary auction clearance rate of above 85 per cent for Sydney, with some truly giant results in some of the inner suburbs.

We won't know the actual answer for a couple of months, but it's rather beginning to look as though the other indices might yet to some extent be playing catch-up to CoreLogic rather than vice-versa.


Edit: CoreLogic's index seems to have had a chart of heart today: quarterly growth rates adjusted down to +4.8 per cent for Sydney and +5.3 per cent for Melbourne.