How To Be A Clever Analyst Of Property Headlines
Recently I interviewed property journalist Kirsten Craze on The Elephant in the Room property podcast. We had a very interesting discussion about the emotive nature of property market headlines and why they are unreliable.
Kirsten had done some preparation for the interview and compiled a series of headlines that had appeared in the space of a few days that perfectly illustrate how readers can get confused.
Negative: Australian property prices will get worse as a mini-credit crunch takes hold
Positive: Sydney and Melbourne property markets won't crash in 2018: John McGrath
Negative: Sydney housing market poised to languish until 2021
Positive: There are signs Sydney's ice-cold housing market may be beginning to thaw
Negative: Sydney Housing Downturn Likely To Last Until 2020
Positive: The three things slowing Sydney’s property market, and why it won’t collapse
Who and what can we believe?
Some headlines are inspired by press releases from banks, real estate agencies, developers, industry bodies and other related organisations. I think it’s fairly reasonable to expect that there is some sort of barrow being pushed in these instances and you certainly get to see a pattern with some sources. For instance, you rarely read a positive headline stemming from a UBS report.
Other headlines come from arguably more objective reports released by data providers such as CoreLogic, domain.com.au and SQM Research. While they may also have an agenda, they employ economists and data scientists, so there is less focus on spin and more on content.
Regardless of the origin of the statistics, nearly all of them refer to median prices and that’s what I want to focus on here.
What is the median price?
Put simply, the median price is the midpoint. If 20 properties sold in a suburb, 10 of which sold between $500K and $1M and 10 sold for between $200K and $500K, then the median price would be $500K.
We need to be careful when using the median price as a tool to measure the market because it can contain many red herrings. There is such a thing as compositional bias, which essentially means that the median price can be distorted by the data.
There really needs to be a large enough sales volume in order to be statistically significant and so comparing month against month can be problematic, while looking at rolling data (incorporating, say 12 months of sales) can be more telling.
In suburbs where there are a lot of very similar properties and the sales volumes are high, then the median can be a reliable marker of market performance. But in areas where there is great disparity of stock and/or low sales volumes, the median is highly unreliable. We discussed this with data scientist Kent Lardner and he explains it really well in episode 6 of the podcast.
What affects the median price?
Following on from the illustration above, if the following month, 13 properties sold, 10 of which sold between $500K and $1M but only 3 small ones sold for less than $500K, the median price would rise, perhaps to $650K. Does this mean that prices rose by 15% that month? No, it just means that a greater number of larger properties sold that month.
The reverse could happen. The government offers a first home buyer incentive and there is a surge in demand for smaller apartments. Upgraders decide it’s their time to sell and move up the ladder. In one month 30 properties sell: 12 between $500K and $1M and 18 for $500K and under. The median price drops to $400K but prices are actually rising because there are loads of buyers competing for the entry-level properties. Then those vendors are upgrading and push up the prices as they in turn compete in a segment of the market with less supply.
There are many factors that can distort the median. Renovations are a big one. Say, for instance, a whole bunch of unrenovated properties sell one year and the median price is $300K. Twelve months later, after they’ve all been renovated, they all sell and the median price rises to $450K. If you only use the median price to measure that suburb’s performance, you’ll think prices went up by 50% in a year! If the renovations cost an average of $100K per property, the real growth rate would have been 12.5%. Herein lies one of the weaknesses in relying on this data without local knowledge.
When a new apartment building hits the market, the median unit price for that suburb is likely to rise, since new stock hits the market at a premium price. And yet the existing apartment values may hold their own or possibly even fall in price for a while until the new apartments are all sold.
In waterside suburbs, there will be properties with views and many without. In the months where more waterfront homes sell, the median will go up. If there are no waterfront sales, the median might fall. Yet individual buyers will find that the median price movements have little impact on their ability to negotiate a cheaper price if other buyers are prepared to pay more than they are.
All of these examples highlight why it’s dangerous to rely on headlines that refer to median prices being up or down. Further investigation is always warranted because Australia is made up of thousands of micro-markets and they never perform in unison. Case in point, an article in the Sydney Morning Herald at the end of July 2018 which listed 20 suburbs each where prices rose and fell for houses and units over the previous quarter.
There are some good examples of misleading medians among the lists in this article. There are also some interesting patterns.
For instance, in all of the top 5 suburbs for house price growth less than 100 properties sold in a year and all of the volumes fell significantly from 2017 financial year to 2018 financial year (ranging from a 10% drop to 41%). We might draw an inference here that vendors in these suburbs are not stressed and low sales volumes resulted in buyer competition, which in turn pushes up prices. However, the low volumes also mean the statistics are less reliable so there may not have actually been any price growth in real terms.
The top suburb for unit price growth was Rushcutters Bay. The sales volumes were significant with 124 apartments sold in the 2017 financial year, falling to 96 in the 2018 financial year. While there was a 22% drop in sales volumes, there were 4 times the number sold in the upper price range and a 42% decrease in sales in the lower price range. In markets with widely divergence styles of property you’ll often see these price movements.
The worst performer for house price growth was Petersham. This suburb saw a 20% increase in sales volume, with a skew away from larger homes. There’s also quite a wide variance of home size, position and condition in this suburb. Once again, small sales volumes under 100 create a median that is going to be less robust than in other suburbs.
The second on the poor performing house list was Sans Souci. Sales volumes in 2017 were higher at 119, down to 93 in 2018. However, it’s notable that 8 waterfront homes sold in 2017 financial year whereas none sold in 2018 financial year. Of course the median will fall when no top end properties sell in the time period.
Milsons Point got the gong for apartment growth. There’s a very wide spectrum in terms of type of property in this suburb - from small 1 bedders up to $8M Harbour view apartments. Sales volumes were static across the two years however the proportion of high-end sales was significantly smaller in the 2018 financial year and proportion of entry-level apartments was significantly higher, the reverse of what happened in Rushcutters Bay. This is an example of where the type of property that sold has caused the median price to fall. Unless we can find sales of 2 similar apartments that are a year apart, it’s very difficult to draw accurate conclusions about price movements.
Lewisham was the second worst unit performer. This is a suburb that has had a large number of new units built over the past few years. In 2011 only 23 units were sold in Lewisham and as construction commenced, volumes steadily rose and peaked at 159 in the 2017 financial year. In that year, 38 apartments (24%) were sold for more than $1M. Over the past year as construction nears completion, sales have slowed down with 71 predominantly new apartments selling, only 4 of which (6%) were over $1M.
Given the limited release of the more expensive apartments, it’s no wonder the median dropped so dramatically.
I’m not here to say that Sydney prices aren’t falling. In many areas, they are, particularly where vendors are stressed or when investors are no longer showing interest and there is not a market of local owner occupiers to take up the slack. In some suburbs, we see that there are properties that attract competition from buyers and those that don’t. The A grade properties that buyers fight for will hold their value and possibly even show some modest growth under current market conditions. B and C grade properties, however, will require price adjustments in order to sell.
For property buyers and sellers to make informed decisions they need to investigate local market dynamics and take the headlines with a grain of salt.