bubble of trouble

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Stats muffle sound of bubble bursting
By Alan Kohler
March 18, 2004

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Is the Australian property market collapsing? No one knows.

The Australian Bureau of Statistics reported this week that finance commitments for investment property fell 15.5 per cent in January, the third consecutive fall. Stephen Koukoulas, of TD Securities, promptly sent a note to clients headed: “The Australian property bubble has burst – the fallout will be ugly.”

But it’s not that simple. The Australian property market is a vast mystery, a swamp where the hopeful and the predatory mingle in darkness.

The total lack of up-to-date, accurate information about real estate is, in fact, a dangerous scandal; if there really is a downturn going on, the 19th century standard of the information flow will make it far worse.

Take this week’s stuff from the ABS. Investment property loan commitments for January were $3.7 billion, compared with $5.3 billion in December – 31 per cent lower. The ABS then adjusts the data, because lending in January is usually quieter than December, to come up with a seasonally adjusted fall of 15.5 per cent.

The ABS gets each lender to fill out a form listing loan commitments for each state; working fast, the statisticians can add it all up in 28 days from the end of the month. So the first problem is that the data is at least a month old.

But also loan commitments are only a rough guide to what is actually borrowed. Was the extra lending in December actually taken up? Will the commitments in January ever be drawn down? Who knows? They certainly haven’t been drawn down yet. What’s more, refinancing arrangements, where loans are consolidated or split, are counted by the ABS as new loan commitments, when they are nothing of the sort.

Old, approximate and adjusted lending data is one thing. The real problems start when you try to find out what’s going on in the market itself.

There are two broad sources of data on prices and sales volumes: State Valuers-General and real estate agents. The ABS mines the former, and two research firms, Residex and Australian Property Monitor, collect material from the V-Gs and by ringing agents up.

Most of the V-Gs are pretty good; they send out their data about 35 days after each settlement has been filed with them. Victoria, however, waits up to 200 days before sending it. And don’t forget settlement is between 60 and 120 days after the property is actually sold.

So, even on the best case, property sales are reported four or five months after a transaction, and in Victoria it can be nearly a year.

That’s what I call dangerously useless information. Residex and APM also ring the agents, and provide more up-to-date information, which is why APM could put out a survey of capital city median prices for the December quarter on February 14 that is entirely at odds with an ABS release of the same data for the same period on March 4 (price moves ranging from 3.2 per cent to 12 per cent versus minus 1.6 per cent to 9.3 per cent).

None of the figures is reliable.

There is no requirement on agents to supply any information about sales other than to notify the Titles Office of settlement, and there is no way of knowing that what they say to those who ring them is true.

Apart from the efforts of Residex and APM, who do a good job selling information products and analysis to the public and institutions, the situation is utterly hopeless.

Compare this with the sharemarket, which is both smaller and less important than the property market. On the stock exchange there is real-time market information and a strictly enforced disclosure regime. And all of it is free.

No doubt it will take an absolute debacle of some sort to prompt governments to introduce some timely, accurate and free information regime into property.

So is Stephen Koukoulas right? Is that property debacle now unfolding? Yesterday, I asked two people who ought to know – Robin Matters, of Mortgage and Estate Realisations, who handles most of the repossession sales for Australian banks, and Ian Graham, who runs the largest mortgage insurer, PMI Australia.

Matters keeps a low profile – in fact, his business is not even in the phone book – but he rings at least 20 agents around Australia every day and sees most of the bank mortgage defaults.

He says he has had an influx of defaults in the past three weeks from around the country, although fewer from Victoria. He says he has some concerns about inner-Sydney apartments, but hasn’t seen any distressed selling in that sector in Melbourne yet. He is, however, worried about the Melbourne rental market.

But Matters also senses a lot of pent-up demand, especially outside Sydney and Melbourne, to the point where he reckons that if there is no further rate rise, the market will kick up again.

Graham says unemployment is still too low for there to be any major problems with defaults, and thus with distressed selling and claims on mortgage insurance.

Another kick-up? He doubts that very much, but from where he sits, the market is not even close to a major turning point yet. Apartment investors still have a lot of equity left in their homes and, for the moment at least, most believe it’s better to accept a low rental than to sell.

But then again, markets sometimes unravel unexpectedly and quickly.

In fact, it might be happening right now. We’ll find out in a few months, after it’s too late.