The Madness and Delusions of Property Cheerleaders
You may have noticed yesterdays Money Morning was more like Money Afternoon. However, you can be assured that contrary to one of the comments on the Money Morning blog
Maybe Chris and his mob have had him arrested for daring to challenge their idiocy?
We havent been arrested. Although as youll see below the property spruikers and cheerleaders arent happy with us.
But before we revisit our property issues from Monday and Wednesday, a quote. Its from the 1841 classic by Charles Mackay, Extraordinary Popular Delusions and the Madness of Crowds.
We started reading the book last night, and before too long we picked out this wonderful passage:
With a weakness most culpable, he [John Law] lent his aid in inundating the country with paper money, which, based upon no solid foundation, was sure to fall, sooner or later. The extraordinary present fortune dazzled his eyes, and prevented him from seeing the evil day that would burst over his head
Which fits in nicely with the Shoppers open wallets in retail boost headline from News Ltd. And then there was this from the preface:
Money, again, has often been a cause of the delusion of multitudes. Sober nations have all at once become desperate gamblers, and risked almost their existence upon the turn of a piece of paper Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one.
Well have more on madness of crowds next week. And nowhere does this madness apply more than the property market. Well show you a fine example that was sent to us by a Money Morning reader from property spruikers The Investors Club.
But thats next week. Today
We notice the property spruikers and the mainstream press are doing what they do best joining forces to keep pumping up the property bubble. How dare anyone question the authority and the knowledge of the mainstream press and four PhDs?
On Wednesday, Rismark International head honcho and spruiker-in-chief Christopher Joye wrote an article for his blog stating:
Sayce makes at least four highly misleading and deceptive statements, which is legal jargon for outright lies, regarding the November RP Data-Rismark Index results. And I would not be surprised if his claims attract a legal response from RP Data.
Where we come from its called asking questions and having an opinion. But never mind.
Mainstream press doing PR for property But Peter Martin at The Age didnt like our take on his article either. In his blog he states:
He [Kris Sayce] has written a rant about RP Data and also The Age that Ive reprinted in full below. Clearing things up for him gives me an [sic] provides [sic] an opportunity to set out clearly what RP Data actually does.
Thanks, but we didnt think it was the role of newsmen to do some part-time PR for the property spruikers.
But then again, this is from the same journo who wrote last year: Its official: Rory wins and House prices surge for 8th consecutive month Steve Keen to walk to Kosciusko!
On top of that, in the blog version of his The Age article he ran with the headline: You should have bought that Melbourne house a year ago.
But back to Peters response to our article and the defence of his, he writes:
The $580,000 figure does not relate to the 17 per cent figure. RP Data does two quite different things, one of them simple and one of them hard. The simple one is to access the Land Titles or Valuer Generals figures (depending on the state) and report the median price of the properties that happened to change hands that month. In November it was $580,000. But it bounces around depending on whats sold that month. Some months a lot of inherently high-value properties are sold, some months a lot of inherently low-value properties.
But heres the punchline:
It [the $580,000 figure] tells you nothing about movements in the price of actual properties.
Hang on a minute, back to the original The Age article:
The latest RP Data index, compiled from Valuer-Generals figures, indicates the Melbourne median house price hit a new record of about $580,000 in November.
So in other words, even though it tells you nothing about the price of actual properties, Peter thought hed run with the big figure anyway.
All the better to suck the first home buyers in with.
Anyway, back to Joye. He tries to claim that weve misrepresented the facts but then goes on to claim how the Hedonic Index is much more reliable than dodgy old Median prices because medians can be much more volatile and dont take into account home improvements, blah, blah, blah
Yeah, yeah, weve got that. But it still makes you wonder why RP Data didnt use the super special Hedonic Index in its latest press release. Instead it chose to use median prices, which are, erm, volatile and unreliable.
But all this is diversionary tactics. The major point remains why RP Data dropped the Hedonic Index from the press release, even though Joye claims RP Data have done no such thing. Heres his clarification of it. He writes:
The final mistake Sayce makes is that he claims that because the RP Data press release referenced median prices, RP Data is no longer publishing its hedonic index. As before, this statement is categorically incorrect For the avoidance of doubt, here is one quote from the release: The RP Data-Rismark Hedonic Indices benefit from exclusive access to the most comprehensive property database in Australian and NZ, which is owned by RP Data Limited (ASX: RPX). RP Data spends over $9 million annually collecting new property information and has amassed a database comprising over 130 million property data records.
Well that doesnt count. Thats not clarifying anything. Its just further praise from themselves about their own index. It hardly removes the doubt about the further use of the Hedonic Index.
As you know, were always keen to make sure we give you a proper analysis of things. And if were wrong or we make a mistake well admit to it. We dont like being wrong few people do but well swallow humble pie and admit it when we are.
Like we did with our median slip-up and our claim that Lord Monckton couldnt produce the draft Copenhagen treaty which he could.
Cloudy picture becomes cloudier But as we re-read the Rismark-RP Data figures and the responses from Peter Martin and Christopher Joye the picture becomes cloudier not clearer.
We wont give a line by line rebuttal otherwise well be going back and forth all day. But for starters Joye states, the first mistake he [Kris Sayce] makes is the claim that the 17% capital growth observed in Melbourne in 2009 is wrong the 17% capital growth rate has nothing to do with median prices.
Doesnt it? How about this snapshot from the RP Data report: MISSING PICTURE
Is this the non-median 17% Joye is referring to? Looks like it says median to us.
Isnt that the 17% The Age was referring to, or is there a 17% somewhere else in the report? We cant tell if its to do with the Hedonic Index because that wasnt published in the press release.
Other than that Joye has a belt at our median snafu again [yawn]. And then offers up another quote from RP Data explaining how great the Hedonic Index is. The same index which isnt quite good enough to make it to the press release.
I dont know about you, but we always thought press releases were supposed to highlight your best points not hide them. Anyway, each to their own.
But lets not forget the mainstream complicity in this either. Although to be fair, well give Peter Martin the benefit of the doubt for the howler of an omission Ill take you through now.
Because our guess is that Peter Martin of The Age needs to grab hold of his editor and give him or her a quick box around the ears. Take a look at these two snapshots of essentially the same article.
The first is the opening paragraphs from the article as it appeared in The Age: MISSING PICTURE
Got that? OK, now take a look at the article as it appeared on Peters blog on the same day: MISSING PICTURE
The type is a bit smaller but the key inclusion is in the third paragraph, RP Data warns that median monthly prices are volatile and says a better guide is to examine median prices over a number of months.
Youd think that disclaimer about the inaccuracy of the $580,000 figure would be important enough to make it past the editors desk. Apparently not.
Why do that when you can claim that the average Melbourne house is now worth $580,000. And even better if you can rub it in by telling your readers that You should have bought that Melbourne house a year ago.
Which is an odd thing to claim seeing as Peter also states in his blog a typical Melbourne house that sold for $443,900 at the start of the year fetched between $440,300 and $580,000 toward years end. Thats a fairly wide range, and worthy of making it into the version in The Age youd think. But again, no.
But if were being accused of being misleading, how does it figure that The Age would use the 17% increase when that should be attributed to the Hedonic Index, even though the RP Data press release states it should be used against the median price for the first eleven months, not for the monthly figure?
Even though Joye claims the 17% has nothing to do with median prices. And Peter Martin claims The $580,000 figure does not relate to the 17 per cent figure.
But take another look at the opening paragraphs from The Age article again:
MELBOURNE house prices soared by 17 per cent in the first 11 months of 2009, outstripping growth in all other capital cities, new figures show. The latest RP Data index, compiled from Valuer-Generals figures, indicates the Melbourne median house price hit a new record of about $580,000 in November.
Is it so unreasonable based on that reporting to think the 17 per cent and $580,000″ are related?
But maybe the Hedonic Index also increased by 17%. But we dont know do we, because RP Data didnt think it important enough to put the world famous Hedonic Index in its press release.
Yep, confusion reigns again.
Based on their comments they believe they were trying to clarify the issue. But it seems to us that theyve muddied it even more.
All indexes have flaws Look, you can read all the comments for yourself and make your own mind up. You can work out whos misleading whom. You can work out whether anything thats this complicated can really be relied on for anything.
But what this really tells you is that you can use means, medians, modes or even Hedonic Indexes to come up with a number, but it means absolutely nothing.
In simple terms what all their efforts come down to is an attempt to reduce human behaviour into a mathematical formula. They fall into the same trap as all mainstream economists.
They believe they can use formulas to minutely predict the behaviour and actions of human beings. Despite this impossible task they continue to believe it can be done. And this delusion makes them strive even harder to become the first to do it.
But its impossible, and its ridiculous for anyone to believe they can do it.
And its equally impossible to create an accurate and scientific formula to calculate the price of housing as attempted by the Hedonic Index. Sorry to burst this bubble, but any hedonic index will have flaws.
In fact, any index, Hedonic or not, will have flaws.
In a 254-page paper for the OECD Handbook on Hedonic Indexes and Quality Adjustments in Price Indexes: Special Application to Information Technology Products Jack Triplett quotes Ho, Rao, and Tang from their publication.
They said:
It [the hedonic technique] has been criticised for lack of theoretical foundation, especially for its functional forms, lack of transparency, and its subjectiveness in selecting the quantities of characteristics.
Triplett responds to criticisms of a Hedonic Index by saying:
When pressed to be more specific, the speaker responds that he has reservations, but not (in effect) objections, that he cannot give specifics, he has rather unease (a frequently used word) about the method, or that it is others who express unease without providing specifics.
Its a typical response. The unease is plain, the index requires subjective inputs. You dont need to be any more specific than that.
If an index is based around subjective inputs then it is only as accurate as the inputs provided. Applying this argument to a Hedonic Index based on the property market you would be naive for not asking about the quality of the data being input by a company that benefits from rising property prices.
The very fact that RP Data chose to omit the Hedonic Index from its press release and instead revert to a [scoff] simple median simply raises more questions about the quality of the data.
Data thats used by property spruikers and cheerleaders as evidence of a never-ending rise in house prices.
Which all goes to confirm what I wrote on Wednesday, that House price statistics cant be trusted.
Cheers.
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