Where is the “Point of Control” for Aussie Housing?
If you’re wondering what the heck we’re talking about, don’t worry, it’s easy. Let me explain…
The “point of control” is a term used by my old pal, Slipstream Trader, Murray Dawes.
He uses it to describe the mid-point of any price movement in financial markets.
As Murray has shown time and again, all markets – and I mean all markets – display these moves. That is they trade around specific price patterns. The patterns can be short, medium or long term.
The timeframe doesn’t matter, there’s always a point of control on the charts.
You’ve just got to know what it looks like and how to spot it.
Knowing what to look for
As you know, your editor isn’t a technical trading expert… far from it. That’s why we’ve got Murray on board. But after Murray explained this recurring pattern to us just once, we picked it up from day one. So that now, anytime we look at a chart we can immediately recognise the point of control.
Before Murray taught me this neat pattern recognition, we’d never noticed it before.
But now, well, we can’t fail to notice it. It’s like when you spot a word in a word search. Before you see it, it’s just a jumble of words. But once you know it’s there, you spot it every time… it’s impossible not to notice it.
But picking the point of control is just half of the deal. Once you’ve found it, you’ve got to know what to do with it.
Take a look at the chart below:
Source: CMC Markets Stockbroking
It’s our old favourite, Harvey Norman [ASX: HVN].
You’ll notice the black line we’ve marked on the chart. This represents what Murray calls the “point of control” or “PoC”. Either side of the PoC are red lines Murray calls the distribution.
Without giving away too much of Murray’s proprietary trading secrets, he uses these lines to determine the best time to get into a trade and, just as importantly, the point to exit a trade.
But it’s not just stocks this works on. Murray uses it to pick the direction of currencies, commodities and stock indices, with amazing accuracy.
You see, Murray’s system works with any market. He’s used it successfully for the past twenty years. So, we thought we’d have a bit of fun this morning to see what it can tell us about the Aussie housing market.
Unfortunately, unlike the stock market, data on the housing market is pretty limited. So we have to work with the best of a bad lot. In this instance we’ll use the Australian Bureau of Statistics (ABS) capital city house prices.
Here’s a chart of the data:
Source: Australian Bureau of Statistics
Before we go on, remember this is your editor’s interpretation of the data, not Murray’s.
What we’re looking for is either a breakout to the upside (the bullish case) or a reversion to the PoC (the black line) and potentially a reversion back to the low point of the distribution (the lower red line).
No crystal ball
The other point to note is that Murray’s system isn’t a market predictor. He doesn’t have a crystal ball to rub that gives him all the answers to tomorrow’s stock prices… and if the truth be told, no-one does.
Instead, what Murray does is play the odds. Looking at the charts with the PoC and “distribution”, Murray can calculate the potential return for a stock based on the likely price move.
He then uses that information to do three things:
- Set the maximum buy price
- Set the profit target levels
- Set the risk exposure level
Once he’s done that he knows with a fair degree of accuracy what the potential returns will be from the trade and what the possible risk of loss will be.
And so, looking at the index of house prices above, we’re pretty sure Murray wouldn’t take the trade as a buyer. Why? Because unless the price breaks through the upper red line the profit potential is fairly limited.
Housing market getting worse by the month
In contrast, if the price reverts to the PoC you’re looking at around a 15–20% drop, and potentially a 40% drop or more if the index reverts to the lower end of the distribution.
In other words, the best chance of making a buck on the housing market right now is to short sell it!
The way we see it, a move back to the PoC for the housing index is inevitable – Murray would never say that, he’s far more cautious with his words. But we would. This I’m afraid is the best-case scenario for property spruikers.
The worst-case scenario is a 40% drop that would wipe most spruiker portfolios from the face of the earth.
And if you look at the latest statistic from Louis Christopher at SQM Research you’ll be astounded at how the spruikers have been caught with their trousers down after years of claiming there’s a housing shortage.
Here’s what Mr. Christopher’s latest note had to say:
“Figures released last week by SQM Research revealed that residential listings for April 2011 rose by 14,035 to 370,638 nationally – a 3.9% increase from March 2011 and a 68.7% increase when compared to the same month (April) in 2010. This is an increase of 151,000 year-on-year.”
Yoiks! A 68.7% increase in the number of properties on the market. That… is… huge.
Now, the clever little spruikers will say, “Ha, but that’s a 68.7% increase in demand as well because these people will need to buy somewhere else to live, so neh!”
Not so. Our bet is the majority of those listing their house for sale will be super reluctant to buy anything before they’ve sold their current home. And you can’t blame them.
If they’re sitting on next-to-no equity in the value of their home, the last thing they’ll want is to double their mortgage commitment by buying a second home before they’ve sold the first.
The consequence? It’ll be rich pickings for patient buyers. Because what you’ve now got is the bursting of the housing-shortage myth.
We’ve said all along the housing shortage was nothing more than a cleverly orchestrated ruse by property spruikers to con gullible buyers into thinking they should buy before it’s too late.
Coupled with the nonsense about the Australian population doubling or tripling in size within the next forty years, buyers took the first-home buyers’ bribe and jumped head first into a debt and negative equity trap.
So now they’re bleeding from the eyes as they struggle under a weight of spruiker-induced debt, competing to sell their home along with the other 370,637 houses on the market.
A number that’s almost certain to rise as each month passes.
What then for the seller who has already seen 219,637 competitors turn into 370,637 competitors? What will he or she do when the competing houses for sale number 470,637 or 570,637?
Will he or she still maintain their house is worth more because the Joneses sold their house for less two years ago and the Jones’s house was nowhere near as good as theirs, “Look at all the money we spent on granite kitchen benches and a home theatre!”
Ah, the age-old issue of value and price.
The three things you must know
So, what does this all mean? It means three things…
It means Murray’s a darn good trader. It means house prices are likely to fall by at least 20% over the next twelve months and more than that over the next 24 months.
And it means you should get ready to buy property when the price is right. Just don’t make the common mistake of thinking a 5% price fall equals a bargain, because it doesn’t.
The time to buy isn’t now.
If you’re a shrewd negotiator – actually, even if you’re not – soon enough vendors will slash prices just to cut the housing albatross from round their neck.
Then, and only then, will it be time to buy property. But just remember, the rise in house prices from the 1980s through to the mid-2000s was nothing more than a credit fuelled boom.
If you’re hoping to get those rapid gains again when property eventually recovers you’ll be sorely disappointed. The best you can expect is a generation or more of price volatility – that means prices falling and rising in regular succession.
Followed by the traditional pattern of steadily rising and then falling house prices.
That, my friend, is the future of Aussie housing.
Money Morning Australia