May 2014 in the Sydney property market. Lies, damn lies and statistics.

If ever there was a month in which readers of the Sydney property market commentariat were left scratching their heads, then May 2014 was it.

On the one hand, the independent research house Residex said in its 22 May 2014 Property Market Update that:

“growth in real terms (after inflation) for the last 12 months is about 17.25 per cent for houses and 10.78 per cent for units [with it being]…reasonable to suggest that this market is approaching a boom mentality.

On the other hand, the Westpac Melbourne Institute Index of Consumer Sentiment released a day earlier appeared to say the exact opposite viz;

…” attitudes towards the housing market took a tumble. The index tracking assessments of ‘whether now is a good time to buy a dwelling’ fell by 6% and is now at its lowest level since November 2010, when the Reserve Bank had been lifting interest rates, and 25% off its highs of September last year. This response is unlikely to be solely driven by the [13 May 2014 Federal] Budget. Respondents have been lowering their confidence levels for some months. Between September last year and April the Index had already fallen by 20%.Confidence around housing is particularly fragile in the major states with the Index being down by around 30% from September’s highs in both NSW and Victoria”.

The curse of the median price and real estate agents as data collectors

To reconcile these conflicting reports you need to appreciate that the each of those opinions is based on a different methodology to the other.

The latter is based on objective, well designed and executed survey methodology.

The former is based on reports from selling agents whose decision to report data or not is influenced by what they perceive could be the impact on their bottom line. In short, it is anything other than a representative sample.

It also suffers from the additional vice of being based on movements in “median prices” which is a fundamentally flawed method of measuring market activity.

The Australian Bureau of Statistics explains the concept of a median price this way: “half of all properties (in the same region and of the same dwelling type) bought/sold in the period did so at a price below the median, the other half had a price above the median.”

That says nothing about the attributes of the property in the middle over two or more separate time periods and thus, nothing about the underlying movement between periods in the value of comparable properties. In short, comparing movements in raw median prices is like comparing apples with oranges.

Whilst RP Data’s hedonic regression analysis attempts to compare apples with apples, it too suffers from the vice of relying entirely upon real estate agents as data collectors.

Auction clearance rates offer some but limited guidance

Despite the prominence given them in mainstream media, especially during the so called 10 week unbroken run of 80% plus clearance rates that ended on 12 April 2014, they too are an unreliable guide as to underlying trends.

The auction results published each Saturday night/Sunday morning by the Fairfax owned APM based on data volunteered by selling agents is by far the most popular source of such information.

Let’s break it down.

• Auctions, including the many conducted mid week, only account for about 25% of all real estate purchases made in Sydney in any given week
• The outcome for both buyer and seller is often different to that which would have been achieved by private treaty (negotiation) and which account for about 75% of all transactions per week
• The auction results published by APM each Saturday night/Sunday morning exclude mid week auctions and thus, necessarily account for less than that 25% of all such purchases
• The size of that already shrunken and unrepresentative sample is further reduced by the number of auctions that were listed but not reported by selling agents. APM only began publishing that collection rate in the week ending 21 December 2013. Over the four months between 1 February 2014 and 31 May 2014 the percentage of reported auctions only twice exceeded 70%, fell as low as 48% in the week ending 29 March 2014 and otherwise averaged around 64%.
• The clearance rates published each Saturday night/Sunday morning are adjusted later in the following week. Presumably because the adjustment almost always knocks about 5% off the clearance rate published the preceding Saturday, the adjusted results are given no media prominence and cannot later be searched on line owing to APM’s practice of defaulting all retrospective search enquiries to their most recent clearance figures.

To expose the likely vulnerability of APM’s clearance rates to distortion as a result of both excluding mid week results and the relatively low average weekly collection rate, it is useful to compare the auction clearance rates published by Residex. Its statistics are based on weekly rather than just Saturday rates and a collection rate which in May 2014 averaged 85% each week in contrast to the circa 64% recorded by APM.

Those results and for the same period last year, are summarised below and for what they might be worth, paint a far different picture to the buoyant near 80% rates trumpeted in the media.

Sales volumes are not the saviour

For some commentators, comparing actual sales volumes (turnover) is the most reliable measure of activity. We agree; provided the data is based on actual settlements as recorded by the Land and Property Information but which, because of the delay between exchange of contracts and settlement, is usually only available six weeks after you need it unless, of course, you rely on the above data collected by real estate agents.

The view from the coal face is more reliable

With the above as the status quo, anecdotes from the coal face may prove to be a more reliable guide.

This is how we saw the month just gone especially but not only, in the price bracket over $1 million and allowing for some winter seasonality:

• Rather than there being a boom, the Westpac Melbourne Institute Index of Consumer Sentiment identifies the underlying trend which was exacerbated by the combined Easter/ Anzac Day break followed by the 13 May 2014 Federal Budget
• That trend coincided with the Affordability Ratio breaching 50% which, historically, has been the tipping point for a market correction
• Ironically, spooked by the same media reports trumpeting 80% clearance rates and other headlines sensationalising reserve prices being smashed, a veritable brigade of buyers, convinced that interest rates must rise some time soon, are sitting on the side lines hoping for the market to cool in the hope of snaring a bargain
• As discussed in earlier editions of CurtiseCall, the market has undoubtedly cooled with the consistency in the Residex clearance rates between last month and May 2013 being a function not of continuing confidence but of a market needing to be propped up by:
  low interest rates – a full 0.5% lower than the 3% official cash rate in April 2013 (lowered to 2.75% in May 2013) and lower still for those borrowing over $1million
  increasingly relaxed lending standards as the four major banks chase market share and
  sellers meeting the market. In May 2014 alone, Curtis Associates received the greatest volume of unsolicited emails advising price reductions since the GFC. Whilst concentrated in the eastern suburbs, those properties werespread through out the entire metropolitan area and were at all price points and included:

• 8/673 Old Princes Highway, Sutherland
• 138 Rainbow Street, Randwick
• 3/290 Willarong Road, Caringbah South
• 6/8A Mosman Street, Mosman
• 11A Mansion Road, Bellevue Hill
• 42 Murray Street, Bronte
• 7 Spicer Street, Woollahra
• 5/162 Brook Street, Coogee
• 3/11 Hendy Avenue, Coogee
• 263 Palmer Street, Darlinghurst
• 57 Acacia Ave, Ryde
• 13/23-25 Myra Road, Dulwich Hill
• 14A March Street, Bellevue Hill
• 3/1 Danks Street, Waterloo
• 62 Boundary Street, Paddington
• 11/543 New South Head Road, Double Bay

Conclusion

That brigade of buyers sitting on the side line have got it right.