Housing gets more affordable?

As an ex-investment banker I've seen all sorts of techniques for packaging up data and charts to spruik a product. Performance chart isn't compelling enough? Crop it and make the bad bits disappear. Want to prove the long-term performance of your strategy? Pick the period in which it performed best. Selling a risky debt product? Get a ratings agency to stamp it with As or Bs (there's a reason they use AAA, AA, A, BBB and not A, B, C, D etc).

A lot of these spruiks are good for a laugh (not if you're the investor of course) but I think the funniest of all is the HIA-Commonwealth Bank Housing Affordability Index.

As I explained in an earlier blog post the housing industry has the problem that the product they sell is expensive.  In English, it's relatively 'unaffordable'. And as most of us are probably aware, 'my product's expensive but buy it anyway' doesn't make for much of a sales pitch. Even worse, it's expensive in a way that time-honoured spruiking methods like 'crop the chart' or 'pick your period' won't cover. Plus ratings agencies don't do 'cheap', just 'safe'.

The solution to this seemingly intractable problem is genius: change the definition of 'affordable'. And once freed from the constraints of the English language, you can pretty much come up with whatever you want.

The magic of the housing affordability index is that it includes in its calculation the reduction in variable interest rates (and hence mortgage payments). Not the entire series of mortgage payments due to be paid over thirty years mind you, just the first (and hopefully the second, but who really knows). Of course, we shouldn't forget that the ABS, when including property in the consumer price index (CPI), also uses a similar approach. Prices, it seems, aren't popular as a measure of prices.

To illustrate what this index largely represents, in the previous blog post I produced my own 'mortgage index' (based on the RBA cash rate), which I've updated and included in the chart below (together with the latest HIA index performance).


Once again the 'improvement in housing affordability (courtesy of the index, not the English language) is almost entirely a reflection of Glenn Stevens and his buddies at the RBA reducing short-term interest rates and very little to do with whether houses have become more 'affordable' (English language definition).

Many members already share the view that (at the moment at least) property seems a very risky way to get decent long-term returns. So you probably didn't jump on www.realestate.com.au when you saw that property had become more 'affordable' (index definition).

But it serves as a useful reminder that we need to look under the bonnet of anything purporting to be an index or measure of performance – whether it's property, shares or any other asset class. It varies from index to index, but the labels can be a very poor definition of what the thing is actually telling us.

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