Misinformation made worse by "negative equity" report

Posted on 14/04/2012  

The greatest curse of the property industry continues to be misinformation.

 When I speak of the property industry, I mean buyers, sellers, landlords and tenants. Everyone else is a servant of the industry, which comprises, essentially, consumers.

 Property consumers need information to make informed decisions. They go to media to get it. But what they get is the opposite of information. They get misinformation.

 The principal cause of misinformation is the pursuit of publicity by servants of the industry.

 The main motivations for the pursuit of publicity are politics, profile and propaganda. All these objectives serve to distort messages and the result is misinformation.

 Organizations which represent servants of the industry are primary sources of press release material with political objectives. Builders want a reduction in red tape and in taxes. Real estate agents want lower interest rates. Developers want politicians and bureaucrats to get out of the way and stop adding to the cost of producing dwellings. Their messages are colored by these objectives.

 Agents have a vested interest in talking up markets and putting a positive spin on clearance rates. They're prime sources of propaganda, often disguised as research.

 Then there are the people who like to see their faces in media. Their pursuit of profile distorts their messages. They tailor their output to their perception of what media is likely to publish. This means something negative, preferably sensationally negative.

 The secondary cause of misinformation is the lack of a filter between these sources and the targets, consumers. That used to be the role of media.

 When I studied journalism there were sacred laws. You had to know your subject, you challenged people and their motives, you checked things and you sought to provide balance. You made phone calls and you asked questions.

 I miss the good old days. The bad new days presents a daily diet of propaganda regurgitated as fact.

 Here's an example: recently Australian media was alive with articles about the rise of what they called "negative equity".

 This suggested there were significant numbers of home-owners with mortgages higher than the value their properties.

 There was only one problem with it: it wasn't true.

 Yet it was presented as fact.

 How could something untrue be presented nationwide as fact? Very easily, as it happens.

 The original source of these stories was a report by research organisation RP Data. Their "Baseline Equity Report" sets out to determine how much equity Australians have in their homes.

 They do this by comparing how much people paid with what their home is currently worth.

 How do they know it's current value? They don't - but they do a guesstimate based on their "automated valuation model". That's one problem.

 Another, larger problem is that equity is NOT the difference between the original price and the current value - it's the difference between the loan amount and the current value. Given that the "Baseline Equity Report" doesn't factor in debt levels (because they don't how much each individual owes) the word "equity" shouldn't appear in this report.

 But the media treatment of this report created a bigger problem because values in some locations (and I stress "some") fell last year and this means, for some people who bought recently, that their home is currently worth less than they paid.

 This doesn't mean "negative equity" because lenders require people to have deposits. So in most cases, the recent decrease in property values in some locations does not place them in a negative equity situation.

 Yet the one- page summary of the “Baseline Equity Report” uses the term "negative equity" a dozen times.

 I asked Tim Lawless of RP Data how he arrived at this new definition of “negative equity”. He replied: “The Baseline Equity Report provides an estimate of value accumulation across the Australian housing market by measuring the difference between the original purchase price of a home and the current valuation for individual properties around the country. Property valuations used in the analysis are based on RP Data’s automated valuation model where the value of more than nine million dwellings is estimated each week.

 “There has been some misreporting in some publication that the analysis factors in mortgage debt. It does not.”

 Indeed. The official data from the Australian Bureau of Statistics shows that most Australian households have substantial equity in their homes and relatively minor value decreases lately do little to change that.

 Indeed, the average household in Australia has $839,000 in assets, against liabilities around $120,000. Brisbane analyst Michael Matusik says equity in home ownership averages $300,000 across Australia. "These are official statistics and they measure actual debt levels, unlike RP Data's study," he says.

 Australian Finance Group says the average loan-to-value ratio across Australia is 68 per cent. That means the average buyer has 32 per cent equity. Last year capital city median prices dropped 4 or 5 per cent on average. This falls a long way short of a negative equity situation.

 All of this information is freely available and takes a matter of minutes to access. As Matusik says: "Journalists need to get off their behinds, stop regurgitating media releases put in front of them and start asking questions."


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