![Auction clearance rates in Sydney and Melbourne have averaged 78.8 per cent over the past seven weeks.](/content/dam/images/g/r/r/6/5/q/image.related.afrArticleLead.620x350.grr1yt.png/1475960124684.jpg)
Let's debate hot housing, hybrids, and whether the fixation with super fund fees in isolation to performance delivers savers sub-optimal retirement outcomes.
The September house price index results are grim for those claiming the market is "cooling". Home values have jumped a strong 0.8 per cent across Australia's five largest capital cities in September, according to the index provider with the most comprehensive data and measurement methodology, CoreLogic.
Over the three months to September 30, national dwelling values have appreciated 2.7 per cent, which is an 11.2 per cent annualised pace, care of the Reserve Bank's rate cuts in May and August.
This is entirely consistent with the lofty auction clearance rates reported in Sydney and Melbourne, which have averaged 78.8 per cent over the past seven weeks – higher than the same period a year ago. (Across all cities the 75.1 per cent volume-weighted clearance rate is also up slightly on 12 months ago.)
![Wrong about house price growth: Reserve Bank governor Philip Lowe.](/content/dam/images/g/r/r/5/q/k/image.imgtype.afrArticleInline.620x0.png/1475562324092.jpg)
Yes, sales volumes have declined but, as we previously explained, this is because new listings in Sydney and Melbourne have been falling as the four-year-long boom exhausts the number of owner-occupiers willing to trade for a capital gain. Lower turnover is therefore a signal of the boom's strength, not any weakness, as the RBA has suggested.
While the new RBA governor, Philip Lowe, concedes that "there remain some pockets where [house] prices are increasing briskly", he advised our parliamentarians that the May and August rate cuts did not stimulate "a new round of house price increases".
"In fact, house price growth has slowed over the course of the year, and I think that is good," he averred.
The wrinkle is he's wrong. Adjusting for CoreLogic's update to its trimming method for removing extreme outliers in April (which boosted the index 0.8 per cent in that month), home values have risen 4 per cent over the five months to end September, which is a 9.9 per cent annualised rate.
This is the period that covers the May and August rate cuts. Over the preceding five months to April 30 national capital gains were a slower 3.4 per cent outright (or 8.5 per cent annualised).
Some have called on CoreLogic to publish a revised daily index using the updated outlier cut-offs. But that is not going to tell us anything we don't already know.
The fact that the revised sample increased the April numbers by 0.8 per cent means CoreLogic previously underestimated house price growth rather than overestimated it, as bloggers and conflicted rivals have inferred.
CoreLogic's hedonic regression method (wonk warning!), which harnesses intellectual property developed by a company I helped create, controls for each property's type, land size, location and other attributes like the number of bedrooms, bathrooms, car spaces, and so on.
It involves repricing 9.7 million homes every day, and CoreLogic says it is working on an even more sophisticated version that adopts the Australian Bureau of Statistics' new geographic demarcations and introduces a variable that controls for the year in which properties are built (and, implicitly, depreciation).
Re-running decades of daily indices across millions of dwellings means the next-generation indices will not be available until early 2017.
In the interim and if the current momentum continues, it looks like our projection for 2016 house price inflation at two to three times wages growth will prove slightly conservative (noting that prices normally fall in December due to seasonality).
Hot hybrids
There have been some juicy new bond and hybrid deals for investors to sink their teeth into, with issuers finally coming to grips with the fact there needs to be more give and less take.
In recent years the trend was for issuers, and banks in particular, to "print to demand", which meant borrowing every single dollar they could lay their hands on while doing everything possible to minimise the price they paid for this money.
While this might sound rational, banks often have informational advantages over the mums and dads who lend them money via hybrids, which can result in unfair deal terms that favour the borrower (banks) over their creditors (investors).
The proof is often in the "secondary market" pudding, with deals infamously trading miles below their original face value. (CBA's Perls 7, cough, splutter.)
Naturally, investors tend not to be long-term stupid, and ripping them off in the short run is a silly over-the-horizon approach – in rounds two and three investors will demand heavily discounted prices as compensation for the risk issuers are hoodwinking them.
A sea change in the bank treasury community led by Commonwealth Bank has furnished a string of attractive opportunities. National Australia Bank's Shaun Dooley recently issued a BBB+ rated bond that offered primary investors about 0.2 percentage points (or 20 basis points) of "extra interest".
In the secondary market this has been competed away, with the price jumping from $100 to $101, bequeathing the original investors (present company included) with healthy capital gains in low-risk fixed-income terms.
Two other securities I liked were a new BBB+ bond from Suncorp's Simon Lewis and the latest listed hybrid purveyed by ANZ's Rick Moscati.
The Suncorp deal was dirt cheap, providing some 40 basis points in annual extra interest compared with where the secondary curve would price it and 65 basis points worth above our modelled fair value level. Within 24 hours it had appreciated from $100 to over $101 as this mispricing was partially recognised.
A similar story was found with the cheap ANZ hybrid, which closed at $100.8 on the first day of trading.
Pay peanuts, get monkeys
One of the craziest investment behaviours I see is otherwise smart advisers and institutions allocating capital based not on their expected post-fee returns but rather on fee budgets alone.
The mad push to reduce investment and superannuation fees at all costs – with zero consideration for the risk and return consequences – is yielding savers terrible wealth outcomes.
I can give countless examples of decision makers choosing poorer products with ultra-low fees in preference to those that trump them in post-fee, risk-adjusted return terms simply because the latter carry higher expenses.
In every other economic market there is a relationship between cost and quality: you pay peanuts, you get monkeys. Yet in Australian finance there is a misguided view that you can buy a Mercedes for the price of a Mazda.
The only alternative reality in which this logic holds is if you believe in the defunct "efficient market hypothesis" and think everyone should allocate to an index fund that pays no attention whatsoever to the underlying valuation integrity of the assets it holds.
Indexing is blindly price-independent investing, and the more people do it, the more financial market prices are likely to be wrong (as active managers who do care about whether assets are under- or overvalued get crowded out by eyes-wide-shut passive portfolios).
If you don't have the skill and expertise to select active managers that persistently outperform, then there is absolutely a role for low-cost index funds. But smart folks can do better.
These fee constraints are also forcing super funds to avoid the best investors in the world and instead "internalise" this function.
But how can a not-for-profit super fund with no ability to issue equity really attract the top talent? And what conflicts of interest does internalisation create?
Surely it is harder to sack colleagues than an external manager when they perform poorly?
AFR Contributor