CoreLogic daily home value index: Prediction status update

[ngallbass]

Prediction status check: how are we going toward a 50% drop in the
Core Logic Home Value
Index (5 capital city
aggregate) from its peak 2020 value by end of 2025?

• Peak 2020 value (Dec 31 2020): 137
• All-time high (May 07 2022): 176.66
• Current value (Jun 22 2022): 174.84

→ Change from 2020 peak to now: +27.6%

→ Change from all-time high to now: -1.0%

→ Change from now for prediction to be correct:
-60.8%

⇒ Average monthly change since 2020 peak: +1.4%

⇒ Average monthly change since all-time high:
-0.7%

⇒ Average monthly change from now until end of 2025 for prediction to be
correct: -2.2%

I am a bot made by /@jesuslover07. Beep boop. I post at most once per week.
These regular posts are made at the request of
the user who made the above prediction.

 

[jesuslover07]

@ngallbass Bonus: expectation value of the next rate rise, as implied by the interbank futures market each day in the last week and a bit:

10 June:  38 bp
14 June:  51 bp
15 June:  57 bp
16 June:  54 bp
17 June:  53 bp
20 June:  52 bp
21 June:  43 bp
22 June:  42 bp

(Inferred from the numbers on this page)

 

[mawmaw5]

@jesuslover07 Like your work but just an FYI this isn't correct. The next rate rise is currently expected to be 0.50%. Read the specs of the contract, but basically the 1.2% rate implied from the price of the future is the average rate for the month of July. Which in July will be the average of 5 days of 0.81% and 26 days of the new rate.

 

[jesuslover07]

@mawmaw5 I believe that's factored in - the page I linked to computes probability of a specific rate rise, based on a formula (linked to from that page) that accounts for the next hike only affecting a fraction of the month a contract applies to.

All I'm doing is getting the numbers on that page, which represent a probability of an assumed 65bp rise (the alternative being zero rate rise), and converting it to an expectation value. Since there's no particular reason that we should expect a 65bp increase, it's more useful IMHO to express it as an expectation value. So e.g. when the table in that page says there's a 64% chance of an increase to 1.5% priced in, I'm saying that's an expected value of 0.64×65bp = 42bp for the increase.

(But I compute my expectation value from their probabilities in order to avoid having to think myself about this partial-month business, which I initially tried but failed to reproduce myself)

If the two options you think are likely are 25bp and 50bp, then an expectation value of 42bp represents a 68% chance of a 50bp hike and 32% chance of a 25bp hike.

 

[mawmaw5]

@jesuslover07 Appreciate the reply but it's not right. Ignore that site and probabilities and look at the future contract spec.

The future is the average price of the ib overnight cash rate index. Note this is slightly different to the target rate but you can reasonably assume it's approx 0.05% lower than the target rate.

You can assume 5 of the days in July will be 0.81% as that's what it is now.

If the price of the cash rate future is implying a rate of 1.22%, what rate do you need for the other 26 days in July to get that average? It's basically 1.31% which is 0.50% higher than today.

You can then look at probabilities and say its a 100% chance of a 0.50% hike or a 50% chance between 0.25% and 0.75% hikes or however you want to slice and dice it.

 

[jesuslover07]

@mawmaw5 If I'm wrong then the ASX page is wrong too. They claim to be taking into account the fractional-month situation too.

Are they simply not accounting for this 0.05 difference, maybe? That might explain it - they're comparing the current cash rate target to the market expectation of the future actual overnight rate:

https://www.asx.com.au/data/trt/rate_tracker_calc.htm

That your read of it?

It used to be the case that the target and actual rates were reliably extremely close, so I can understand why this calculation would have happily conflated them in the past.

Would love to do the calculation myself based on the raw data, but would need to understand it properly - as mentioned I failed to reproduce the ASX numbers when I tried. Like, they're 30-day contracts, right? But there are not always 30 days in a month. Where can I get these details to make sure I can calculate things exactly right?

Edit: and where is the below figure published?

You can assume 5 of the days in July will be 0.81% as that's what it is now.

Further edit: think I have the info I need - the contracts appear to correspond to calendar months, not exactly 30 days. And the current overnight rate can be backed out of the June contract price, though I'm sure the same information is elsewhere.

Further further edit: latest market data is here, but would be nice to have a history too.

 

[supersammy]

@ngallbass

I am a bot made by /@jesuslover07. Beep boop. I post at most once per week. These regular posts are made at the request of the user who made the above prediction.

Wait, he requested you to post this regularly and then blocked you within two weeks? lol

 

[danacarter]

@supersammy Definitely sounds like something he'd do.

 

[billyboy]

@ngallbass I love that OP created this bot in response to the user's crazy assertions...then the user blocked OP's bot...!

 

[alchemist_jay]

@ngallbass Record-low unemployment, shortage of houses demonstrated by tight rental market, elevated household savings, terms of trade at highest ever, and decades of government policies to maintain high house prices.

All points to -60.8% for me!

 

[mssurrendered1]

@alchemist_jay Hmmmm I’m not entirrrely sure but I sense some sarcasm.

What about rising interest rates and inflation eating into affordability?

To maintain the same P+I at 6% you can only borrow 60% as much as you can at 2%. With rising costs of everything you can’t even afford the same P+I.

Nothing matters but affordability. Nothing.

 

[lindseym1013]

@mssurrendered1 That’s misleading since the banks never assessed affordability at 2% I think the lowest was 4.5%.

What you should be comparing is assessing affordability between 4.5% and 8.5%

 

[resjudicata]

@lindseym1013 The banks never assessed affordability at 2% you're right. They're also not going to assess at 4.5-6% when rates rise... They'll assess at 6-9%

 

[lindseym1013]

@resjudicata You know what’s between 6-9%…. 8.5%

 

[danbu]

@lindseym1013 My favourite comment on this thread

 

[resjudicata]

@lindseym1013 Except they haven't been assessing at 8.5% for the last two years...

Point being the assessment level only impacts those people who already have a mortgage, not those looking to refinance or get into the market... They will be subject to higher assessments reducing their available credit which was OPs point.

 

[lindseym1013]

@resjudicata Yeah no shit Sherlock they’ve been assessing at 4.5%. The point being, to quote yourself “WHEN RATES RISE” they’ll be assessing at more like 8.5%.

So the true measure of change In affordability for new loans is between 4.5% of the PAST and 8.5% of the FUTURE.

 

[mssurrendered1]

@lindseym1013 Fair call

8.5% v 4.5% is 65% (a compared to 60% comparing 2% to 6%)

So only a 35% drop in affordability instead of 40%.

Pretty sure my point still stands

 

[lindseym1013]

@mssurrendered1 Thanks for comparing

This also assume people lend to their max, so whilst the lending limit drops 35% that doesn’t mean loan values will drop that much.

 

[mssurrendered1]

@lindseym1013 There’s a million assumptions. Also assumes that prices don’t skyrocket and they keep their job.

And maybe every billionaire and millionaire on earth comes in to Australia and prices 10x.

I’m just saying all else equal affordability drops