Overseas Investors & the Commonwealth Bank

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On Thurs­day Sep­tem­ber 9th 2010, the Com­mon­wealth Bank released a doc­u­ment on the Aus­tralian hous­ing mar­ket, to sup­port a tour that its senior exec­u­tives are mak­ing to meet over­seas investors.  The press release for the doc­u­ment was as fol­lows:

Aus­tralian Res­i­den­tial Hous­ing

Syd­ney, 9 Sep­tem­ber 2010: Senior exec­u­tives from the Com­mon­wealth Bank of Aus­tralia (“the Group”) will soon be trav­el­ling over­seas to meet with some of the Group’s off­shore share­hold­ers and oth­er investors inter­est­ed in Aus­tralia and the Aus­tralian bank­ing sec­tor.

In the light of recent com­men­tary from a num­ber of sources on the robust­ness of the Aus­tralian res­i­den­tial hous­ing mar­ket, the Group (giv­en its sig­nif­i­cant expo­sure to this sec­tion of the econ­o­my) antic­i­pates that this will be an impor­tant issue for many of the investors it is sched­uled to meet with.

In antic­i­pa­tion of these dis­cus­sions, the Group has pro­duced a pre­sen­ta­tion enti­tled “Aus­tralian res­i­den­tial hous­ing mort­gages: CBA mort­gage book secure”. A copy of this doc­u­ment has been lodged with the ASX today. (Com­mon­wealth Bank)

The doc­u­ment the press release refers to has a table (on page 4) com­par­ing house price to income ratios in Aus­tralia with those from a num­ber of coastal cities overseas–with the argu­ment being that Aus­trali­a’s rel­a­tive­ly high house price to income ratios are a by-prod­uct of the fact that Aus­trali­a’s major cities are all locat­ed on the coast. By the looks of this table, Aus­trali­a’s house prices are com­pa­ra­ble to those elsewhere–Sydney’s 6.2 ratio, for instance is below the 7 times ratio of its sis­ter city in the USA, San Fran­cis­co.

So there’s noth­ing for over­seas investors to wor­ry about then? Not if these fig­ures can be trust­ed. But can they?

Kris Sayce, of Mon­ey Morn­ing is even more of a scep­tic on Aus­tralian hous­ing than I am, and his scep­tic’s eye spot­ted the fine print to this table: notice that there are 2 data sources, Demographia and UBS. A quick check of the Demographia data (check Sched­ule 1 on pages 31–37) shows that all the non-Aus­tralian num­bers in that table come from Demographia, but none of the Aus­tralian num­bers come from there. Kris then pub­lished a revised table where the Demographia num­bers for Aus­tralia are sub­sti­tut­ed for the ones shown above–which by infer­ence have to come from UBS. Kris observed that:

In order to make their point, the CBA have used the Demographia num­bers as a ref­er­ence point for all the non-Aus­tralian cities, yet they’ve used the UBS num­bers for the Aus­tralian cities.

Why on earth would the bank do that?

Sim­ply because if they’d used the Demographia num­bers it would draw exact­ly the oppo­site con­clu­sion to the argu­ment they’re try­ing to make. The fact is, they’ve con­ve­nient­ly grabbed the bunch of num­bers that fits their argu­ment and dis­card­ed the ones that don’t.

If they’d used the Demographia num­bers for all the cities, includ­ing the Aus­tralian cities, the table would look like this:

Paints a slight­ly dif­fer­ent pic­ture doesn’t it? Actu­al­ly, it paints a com­plete­ly dif­fer­ent pic­ture. One shows an unsus­tain­able bub­ble, the oth­er shows a bunch of fig­ures com­pa­ra­ble to else­where in the world. (Kris Sayce, Mon­ey Morn­ing)

I sug­gest that any over­seas investors who attend pre­sen­ta­tions by this team ask them the fol­low­ing ques­tions about this table:

1. Why did you use UBS data exclu­sive­ly for the Aus­tralian cities, and Demographia data exclu­sive­ly for the over­seas cities?
2. Demographi­a’s num­bers show the “medi­an house price divid­ed by gross annu­al medi­an house­hold income” (p. 7). How are UBS’s num­bers cal­cu­lat­ed?
3. What would the ratios be for the non-Aus­tralian cities, if the UBS method­ol­o­gy was applied to them?

I would be very inter­est­ed in hear­ing  the answers to these ques­tions.