Property statistics: What they reveal and what they conceal
"Statistics are like a bikini. What they reveal is suggestive, but what they conceal is vital." – Aaron Levenstein, associate professor emeritus of business, Baruch College.
Statistics – don’t you love them? Or perhaps I should rephrase and ask – do you understand them? Don’t feel the need to grope in the dark for an ad hoc explanation of the data – even “experts” fight over the publicised and regularly conflicting reports that solidly “claim” we’re both in a rising and falling market.
In fact, Oxford Mathematician Peter Donnelly produced a wonderful Ted Ed lecture on the subject, which demonstrates rather succinctly how a simple and common misreading of statistics can have serious repercussions on an individual’s life. He paints the story of Sally Clark, a British lawyer who was imprisoned for the murder of her two sons who tragically died of sudden infant death syndrome.
The chances of sudden infant death syndrome occurring in a professional “non-smoking” family unit are around one in 8,500 – therefore the “distinguished” paediatrician who testified against Sally at her trial, “logically” squared the formula and calculated the chances of two children dying of the same condition was around one in 73 million. In effect, it put the jury in no doubt of her guilt.
Of course, the paediatrician was absurdly incorrect in his “assumption”. In truth, the chances of a second child dying from the same condition could be influenced by a number of external factors – both genetic and environmental – of which a microscopic view of basic statistics won’t take into consideration. Therefore, without going into too much detail, two deaths flag the need to consider the overall picture from a broader angle, eventually proving it was “more” not “less” probable for the second death to occur. Thankfully, the conviction for Sally was overturned and consequently, two other mothers convicted for similar crimes were also released. However, it clearly demonstrates how frequently statistics are misinterpreted by seemingly well-respected and educated individuals.
As for property prices – going into intricate detail on how monthly and quarterly data is collected, collated and interpreted is a science in itself. The reasons for the discrepancy can be broadly explained by the method, duration and specific grouping of data which differs between each agency provider. However, for those interested, it’s worth browsing through the ABS publication – it’s written in such a way, that if you’re not presently confused or averse to reading heavy educational research documents – you soon will be! Therefore, before you feel tempted, take note of the following ABS statement which sums up their purpose perfectly: “They are published primarily for use in Government economic analysis.”
As a case in point, over the past few weeks we’ve seen RP Data-Rismark, Residex, and the REIV all produce differing interpretations of the state of Melbourne’s market for the both the month of June and June quarter. RP Data were first off the bat, recording a rise of 1% in Melbourne’s median house price over the month of June to $480,000. The REIV were slightly more “bullish”, recording a rise of 2.9% in the June quarter taking the median to $520,000 (although they did specify that the gains were no more than a correction of previous drops in Melbourne’s median data). As for Residex, they have collated their own figures and recorded a drop in both the month of June and the June quarter by -0.49% and -1.31% respectfully. They record Melbourne’s current median house price at $555,000. So who do you believe?
All of the above is irresistible fodder for industry professionals who can “pick and choose” which data to reference (or ignore) based on their own reference point. However, I often wonder if any actually take the time to weigh up the information or research the methodology behind their findings?
The dialogue that has been published and subsequently scrutinised based on these conflicting results has consequently split the “bulls” and “bears” directly down the middle. According to random groups of commentators we’re both “recovering” and “falling”. Furthermore, how does the average home buyer or investor cope with such conflicting information circulating through various social media outlets or out of the mouths of “respected” industry professionals?
Does a vendor add or subtract a percentage or two to their asking price or reserve prior to an auction?
Do investors and buyers make hard and fast choices whether to sell, buy or hold based on the information?
I know from my own experience, purchasers who read media commentary will often be shaken one way or the other – depending on the report. However, considering how commonly the statistics are “skewed” it’s a somewhat foolish path to adopt.
Having said this, you can understand why various realtors jump on any glass half full opportunity to pump the market. In an industry reliant on turnover, a lack of confidence in the investment sector – the demographic particularity sensitive to statistical commentary – can be extremely detrimental. Investors are all but worshiped by realtors; well known for their non-emotional and often speedy approach to the buying/selling process.
However, as I cited above regarding the falsely convicted lawyer Sally Clarke, it’s important to understand a broader set of influences other than median data if you really want to grasp the statistics and draw a line where conflicts arise. For example, assuming a rise in median prices signals a broad based “recovery” the housing market becomes rather shaky when you take into account (as I pointed out last week) “overall” year to date turnover is lower than it has been over the previous four years – particularly so in Melbourne.
Other statistics indicate a large amount of stock lingering on the market. Nationally there are over 300,000 homes for sale and the previous norm has been closer to 200,000. Once again, this is specifically pronounced Melbourne – and therefore any assumption we have entered an extended period of growth, goes against the well known premise that more supply equals lower values.
Furthermore, the clearance rate of late has been jumping around like a yoyo. Melbourne’s clearance rate last week came in at 61% based on a similar number of auctions to the previous week, during which it came in at 52%. Clearance rates don’t generally move nine percentage points in one week, however, once again, industry commentators can take their pick which to “believe” or reference, all depending on their glass half empty or glass half full viewpoint.
The other layer of complexity that needs to be considered, is even with a stratified index which segregates property into different types based on number of bedrooms and so forth, it’s impossible to draw a hard and fast conclusion on a commodity which is purchased – in many cases – solely on a buyers individual tastes and needs. Unless we’re looking at a row of identical terraces with little to no differentiation between them, a home can mean one thing to one buyer and something completely different to another. Therefore, any reading of statistical data – especially when turnover is low – is no doubt down to the particular composition of properties selling rather than an indication of market recovery.
Take for example the tale of two houses recently auctioned on the same street in the attractive bay side suburb of Hampton in Melbourne. Both are four-bedroom detached dwellings situated on ample land sizes with north facing rears. One block featured a rather dated 1990s dwelling, “liveable”, but in need of work over the long-term. The other featured a property that had been updated with an element of “wow”, complete with an in-ground swimming pool in the back yard.
At the beginning of June this year, the 1990s dwelling was auctioned, attracting a large crowd of interested participants and no less than four bidders. The sale price exceeded both expectation and reserve, selling under the hammer for $1,695,000. It was a boom price and trended directly against the doom and gloom reports recently circulating in the media. No doubt the owner of the second property was rubbing their hands together in gleeful expectation.
Three weeks later and the second home was auctioned, however this time, the event only attracted a small crowd of neighbours. With no evident interest from the crowd, the home passed in on a vendor bid for $1,625,000 and remains on the market today.
This tale is far more relevant to property buyers than the frequently referenced statistics. There is no fast and hard rule to what will attract one buyer to pay above current assessed value or a second to turn their nose up at the same property – as the well known saying goes: “Beauty is in the eye of the house buyer” – and ever more so in a market atmosphere where turnover is arching back to that of the late 1990s.
However, the number that will feed into the median statistics is the boom result – thereby inflating the median data. Considering the above story is a common function of a sluggish market, where only the “best” homes attract healthy demand – a rise in the median indicates precisely this – and is not necessarily an emerging trend of market recovery.
The same applies to the two properties in Hampton. I could give you a number of reasons why the first property attracted four bidders and sold for a boom price in a dwindling market atmosphere – however I won’t be assessing the stats. I’ll be looking at the property, location, buyer interest, historical performance, suburb profile and potential for future development.
As for the average home buyer, well the statistics may indicate whether it’s a buyer or vendor market, however they’ll give little clue to the current value of a property aside perhaps an inkling of overall sentiment. Similarly, a valuer will give statistics just a passing thought when completing a sworn valuation – assessing recent comparable sales is obviously a better property specific indication.
Until overall turnover markedly improves and the clearance rate – which broadly indicates the heat in the market – rises and stabilises consistently week to week you may as well give microscopic monthly, or for that matter quarterly, statistics little more than a cursory glance.
Over the past few weeks there have only been around 350 properties auctioned in Melbourne – approximately half the usual numbers we experience. Therefore, a relatively low number of “extra” sales occurring from one Saturday to the next obviously affects the clearance rate percentage to a greater degree than it would had there been 600 properties auctioned.
So does a jump in one week’s clearance indicate market recovery? No. Rather, it represents the particular composition of “good” properties available from one week to the next. Similarly, a rise or fall in the median house price in any one month when turnover is so terribly low, indicates little more than a monthly blip on the radar. As you can see from the Hampton example cited above it is possible to achieve growth in a flat market. However, it simply reiterates the rule, you have to buy well, to sell well.
Market research is important, however it never accounts for individual circumstance and neither is it sight for the blind. There are always risks associated with any investment, however property isn’t an item to be traded like stocks and shares. It’s a vital commodity essential to our very survival. Therefore, prior to any purchase put aside the market commentary and weigh up the risks carefully.
Catherine Cashmore is a market analyst with extensive experience in all aspects relating to property acquisition. She is Channel Ten’s property expert on The Circle.
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