Dangers in a daily index

A new daily house price index could ultimately result in financial speculation driving property markets.

PORTFOLIO POINT: The RP Data-Rismark daily home value index may improve the timeliness of data, but it could ultimately lead to a distortion of the property market cycle.

“Finally, turning to finance: the ASX All Ordinaries was down 12 points and the All Dwellings house price index was down 0.17 points today. Sydney home owners were in the money with dwelling prices up 0.46 points there; unfortunately, Perth households are a little poorer today – the index was down 0.7 points in our western capital.”

That news grab is fictional, but the data isn’t – they are actual figures from Monday – and a daily dose of house prices could soon be our reality if a new, improved index from RP Data-Rismark gains traction with the media.

Property investors are already spoilt for or drowning in data – depending on your attitude to statistics (see What data drives property decisions?, February 1) – so what is the new index, and does it matter?

In essence, the RP Data-Rismark Daily Home Value Index (its formal name) is an evolution of a well-established index, which permits the publishing of property price movements on a daily basis, with a lag of just one day. Previously, the index was published monthly, with the results coming out one month in arrears.

This much-improved timeliness is one of the key features of the index, according to Tim Lawless, RP Data’s research director. “There is also an improvement in the underlying methodology that increases the accuracy of the index. Property buyers can have more faith in it and have it earlier.”

Lawless recognises that there is limited value for property market participants in knowing what happens to their property values over a 24-hour period. For instance, on Monday the percentage movement for the five capital city aggregate index (Sydney, Melbourne, Brisbane-Gold Coast, Perth and Adelaide) was down just 0.03%. Rather than the daily movement, for Lawless it is about revealing trends over a slightly longer time frame.

“There is the opportunity for consumers to have a look at how the index has moved over a two-week period and to get the most up-to-date and robust figure on market trends.”

However, there is an indirect aspect to this index which could be far more significant to the property market. This takes us into the world of financially traded instruments, such as index trackers, futures contracts and other derivatives. And in truth, this is the main game with this index, and where the big bucks are. RP Data-Rismark has created this product for the Australian Securities Exchange and you can now view it on their website, as you would the All Ordinaries.

Nothing has been announced yet by the ASX, but it is almost certain that at some point in the future, new tradeable products will be released that are based on the home value index. The most simple could be financial products that track the index, allowing individuals and institutions to 'buy’ the market trend across all our capital cities or for individual cities.

Nigel O’Neil, CEO at Melbourne-based estate agents Hocking Stuart and a former banker, believes it may suit some people to buy a financial product based on the property index, rather than physical bricks and mortar. “I’m not really concerned that people will buy an instrument based on the index as opposed to a property. One of the massive hurdles for entry into the property market is that you have to have a large deposit and you must have a certain repayment capability.”

But O’Neil highlights the difference between buying the index and buying physical property. “We are talking about balancing out Brighton with Bayswater in Melbourne, for instance. It won’t be an index where you can invest in a specific area or specific suburb.” In his opinion, it would be a fairly conservative investment.

And that’s the rub, a point which O’Neil drives home: “When you’re investing directly in property to make money, you’re investing to obtain capital appreciation over time and you want to pick an area where the appreciation is going to be greater than the average property market place. The risk profile is very different.”

Exactly! And what would be especially worrying would be if financial advisers directed investors into these low-return products because of the ease of earning fees from a standardised financial product, rather than because the products were right for their clients.

The real interest in the home value index will be institutional. “However, it may also be of interest to SMSFs, who want to get exposure to the property market but don’t want to blow out the diversification of the portfolio by buying a physical asset – given that $300,000 in a super fund can only buy a one bedroom unit – and wish to avoid the transaction costs associated with buying physical property,” says Lawless.

We are also likely to see futures contracts based on the index, allowing traders to take a position on whether they think the real property market is likely to rise or fall in a month’s time, or two months’ time or whatever timeframe they choose.

In my opinion, these products could see an acceleration and distortion of the physical property market cycle. O’Neil agrees: “Investors may say to themselves, 'if this index points to future capital appreciation and is right, I’ll rather enter the market sooner than later.’ Conversely, if the expectation is that the index will come down, investors may delay entering the market and it will suppress prices.”

But would this be such a bad thing? Like the stock market, property is driven by supply and demand, but an important difference is the impact of market mood or sentiment. Moods change relatively slowly in the property sector, because it takes time for participants to decipher and weigh up the myriad of economic, supply and demand determinants, not to mention other structural issues germane to property that slow down the process, such as relatively long settlement periods.

In contrast, the stockmarket is like a hyperactive child, up and down on the latest good or bad news. It is easy to conceive a situation where rampant speculation on the property futures market begets rampant speculation in real property.

In light of the economic destruction wrought by Wall Street in recent times on the US property market, and the global economy, I think it’s not too fanciful to suggest that these financial innovations could, at some point in the future, adversely re-engineer the Australian property market through speculative activity.

Of course, it may turn out that signals emanating from these futures contracts are given little credence by investors in physical property. Homebuyers may continue to base their buying decisions on the usual lifestyle or capital appreciation requirements – let’s hope so. But it would be highly undesirable if financial speculation, rather than underlying fundamentals, became the principal driver of real property markets.

Property Q&A

This week:

  • Should I buy another apartment in New Farm?
  • Finding value in Melbourne's west.
  • Is 2012 a bad year to sell?
  • Baby boomers and the time-bomb myth.

Buying in Brisbane's New Farm

I live with my partner in a two-bedroom apartment in New Farm, Brisbane. We’re looking to rent out the apartment we’re living in and spend between $600-700k on a two-bedroom, two-bathroom apartment on the top floor (four levels) in a 12-unit complex overlooking New Farm Park. The apartment also has city views and is surrounded by heritage-listed housing, which should hopefully remove the risk of the view being built out. I’m interested in your thoughts on the merits of this investment strategy. We both like the lifestyle New Farm has to offer and thus don’t want to have to sacrifice this to move further into the suburbs to buy a house.

There are two key things to initially consider: is your current property investment-grade? And how will your financing arrangements impact the tax deductible status of your existing apartment if you retain it?

The second question can be answered by a mortgage broker and/or an accountant. To answer the first question, employ a professional adviser to assess the investment potential of the apartment you’re thinking of retaining according to strict investment criteria: location, building style, position in the block, off-street parking, potential for capital growth, projected rental income, and so on. Make this decision rationally.

I have no problem at all with New Farm and it sounds like you’ll enjoy your new apartment. Heritage protection is often a good sign, but check to see if any other projects are pending in the area that might adversely affect your lifestyle or future value.

However, even if the answers to the above questions are positive, from a diversity perspective it may still be unwise to have two properties in New Farm – i.e. having all your all your eggs in the New Farm basket.

Melbourne's west

The inner western Melbourne suburbs of Williamstown, Newport, Yarraville and Seddon are often unappreciated from an investment perspective, yet have achieved consistent capital growth for the last 10 years. Why don’t you recommend these locations for investment purposes?

It is true that these suburbs have performed admirably in the last 10 years, along with a large number of other prime sectors. Nevertheless, they’re not in my top investment picks for a number of reasons. First, they tend to have less amenity and fewer facilities – especially educational options – than traditional investment suburbs in Melbourne. There is also less diversity of local employment opportunities if residents don’t want to work in the CBD. Whether we like it or not, the bulk of Melbourne’s population is centred on the eastern suburbs, and hence that is where demand is most intense.

Nevertheless, some of your suggested suburbs are great, with lovely heritage streetscape that is close to the CBD and Bay. If you have reasonable exposure to the east side, there is certainly merit in considering a west-side investment, especially in Yarraville or Williamstown. Be sure to stick to quieter/pleasant residential streetscapes – away from any industrial activity – with consistent architecture and the best amenity in the area.

Buy v sell

If 2012 is a good year to buy, does it mean it is a bad year to sell?

I actually think the playing field is pretty level and steady for buyers and sellers at the moment. It is a balanced market, which makes the process of buying and selling relatively transparent and straightforward for all parties. This transparent market is especially good for homebuyers who are looking to trade up or down as prices are unlikely to move against them.

More generally, if you know what you are doing or obtain the right advice about method of sale, marketing, timing, the selection of a real estate agent and so on, you can sell well in a buyer’s market and buy well in a seller’s market.

Boomer glut?

There have been some comments lately that $1 million-plus properties will be difficult to sell in the next five to 10 years due to a glut of such properties from many baby boomers. What is your view?

I don’t believe that there is a baby boomer demographic time bomb that is about to go off. Analysis shows that downsizing by baby boomers over coming years will be a very slow and measured process and the modest increase in supply of property for sale from this cohort will be comfortably outweighed by increasing demand driven by the growth in Australia’s population and rising wealth and incomes of its residents.

Yes, there may be pockets of Australia where this phenomenon may occur – think of regions where there is a disproportionate number of retired home owners. More generally, properties in the very top end – say over $2.5 million – where there is a very small pool of potential buyers, such as in beach house locations, may also struggle, especially while the strong Australian dollar discourages interest from overseas.

Monique Sasson Wakelin is a director of Wakelin Property Advisory, an independent firm specialising in acquiring residential property for investors. Monique can be found on Twitter: @WakelinProperty.

Note: We make every attempt to provide answers to readers’ questions, however, answers are of a general nature only. Subscribers should seek independent professional advice for more in-depth information that is specific to their situation.

Do you have a question for Monique? Send an email to monique@eurekareport.com.au