Sydney’s property market and the need for greater data transparency

In this, the last edition of CurtiseCall before the launch of the new Curtis Associates website, we reproduce below our Submission to the Standing Committee on Economics Inquiry into Home Ownership. That submission will be supplemented by evidence our Principal has been invited to give to the Inquiry later this week.

With a potentially but not necessarily heated spring buying season less than four weeks away and interest rates for owner occupiers likely to stay low for a while longer, this article might help the many property buyers desperate to get a handle on what really is happening.

The hope is that if adopted, the recommendations in our Submission will put an end to contradictory commentary like this published in the Sydney Morning Herald on 3 August 2015:

“The price of Sydney homes selling at auction plummeted 9.1 per cent over July, new figures from Domain Group indicate…

Despite Domain Group’s figures showing auction prices dropping in July, another researcher CoreLogicRP Data releasedfigures on Monday showingSydneydwelling values jumped 3.3 per cent over the month. These figures include private treaty sales”…

“Introduction

Thank you for the invitation to make these submissions to the Committee’s Inquiry.

What follows:

• relates to these topics in the Terms of Reference:
  • demand and supply drivers in the housing market and
  • opportunities for reform
• relates solely to Sydney’s residential property market
• may not apply to other Australian residential property markets and
• assumes a political appetite as well as a Constitutional ability to implement the reforms suggested.

Submissions

In our view, it borders on the astonishing that housing policy and interest rate settings are so heavily influenced by and in some cases based upon, data selectively provided by industry sources having a vested interest in conveying the impression of a consistently buoyant market.

The open reliance of policy makers, including the Reserve Bank of Australia, on such data amounts to an endorsement of that data which in turn, influences directly the “animal spirits” actuating the day to day purchasing and selling decisions made in the residential property market thereby creating a perfect feedback loop.

Absent a root and branch re-assessment of that data and how it is collected, it is submitted that those policy settings and concomitant answers to questions about housing affordability and bubbles, underquoting and foreign ownership will continue to go round in circles as they have done now for decades.

The current environment and its culture

Historically, Sydney’s residential property market has been dominated by sellers and the real estate industry that represents them.

As a result, a one sided culture has developed which alone explains why absurdities like these are regarded as normal:

• sellers are always represented by an agent whereas buyers usually are not
• despite the fact that in every real estate sale there has to be buyer, it was not until November 2014 that the words“and purchase”were added to the heading of the NSW standard form contract previously entitled“Contract for the sale of land”
• acceptance of the practice of keeping some sales [/purchase] prices confidential; the most absurd illustration of which being sellers who assert confidentiality over a price paid at a public auction. For someone attending such an auction, that price is not only freely available, it is often a source of entertainment culminating in applause. For someone later researching the same price remotely, the result is a silent“Price Withheld”.
• In the equities market, such discriminatory withholding of information and lack of transparency would almost certainly be unlawful
• widespread indifference to the conflict of interests faced by the two dominant data collectors, analysers and market commentators, Australian Property Monitors (APM) and RP Data Core Logic which, respectively, are owned by and affiliated with media companies deriving substantial classified advertising revenue from sellers of real estate.

Some consequences of this culture

1. Selling agents are the gatekeepers of data

Unsurprisingly, selling agents are the primary and almost exclusive source of the data upon which most published market commentary is based.

Those agents are presently free to choose what data to report, when to report it and more important, what data not to report – especially if it conveys a downbeat impression of the property market.

2. There is an obsession with the drama of auctions and their clearance rates

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.

Breaking this down:

• auctions, including the many conducted mid week, only account for about 25% of all residential real estate purchases made in Sydney each week
• prices paid at auction are usually higher than those negotiated in a cooler private treaty environment; the latter of 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 account for less than that 25% of all such transactions
• the size of this 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 reporting 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%.
• With many parts of Sydney’s residential property market currently running hot, it is perhaps not surprising that APM’s current average reporting rate has improved. For example, in the three June 2015 Saturdays to and including 20 June 2015, the average reporting rate was 80% with an average unadjusted auction clearance rate for those Saturdays of 84%.
• In contrast, the percentages published by rival independent research house Residex for the same three Saturdays respectively averaged 85% and 79.6%. (As RP Data Core Logic publish weekly not daily reporting and auction clearance rates, it is not possible to compare its performance).
• With sensitivities so fine, it is of concern to note that APM’s “highest ever clearance rate” of 88% on Saturday 28 March 2015 was based upon its third lowest reporting rate so far this year of 75% being 3% points higher than the 72% reported for 1 March 2015. The lowest reporting rate this year was 66% on Anzac Day.
• the auction clearance rates published by APM each Saturday night/Sunday morning are adjusted later in the following week. Presumably because those adjustments usually take about 5% from the clearance rate published on the preceding Saturday night/Sunday morning, the adjusted results are given little to 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.

3. There is a similar obsession with median prices as a measure of market performance

The Australian Bureau of Statistics defines the median price in these terms: “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.”

This definition 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.

It is submitted that comparing movements in raw median prices is like comparing apples with oranges.

Whilst hedonic regression analyses prepared by RP Data Core Logic attempt to compare like with like, they too suffer from the underlying vice of relying entirely upon real estate agents as data collectors.

4. There is hardly any reporting or analysis of private treaty transactions

As noted earlier, although negotiated/private treaty transactions typically account for around 75% of all transactions with lower prices being paid, their details are barely reported and almost never make headlines.

Recommendations

That all real estate agents whether acting for the buyer or seller of residential property be required to:

(1) report on line to a central authority all residential property transactions within 24 hours of contracts being exchanged identifying the:

• property address
• names and addresses of the buyer(s) and seller(s)
• agreed price
• improvements made to the property in say, the last six years and
• cost of those improvements.

It is further submitted that consideration of introducing the above reporting obligations represents a convenient opportunity to revisit the idea abandoned in 2009 of making all such real estate agents as well as lawyers, conveyancers and accountants subject to the provisions of the CommonwealthAnti Money Laundering and Counter Terrorism Financing Act 2006. In that event, the required information should be extended to include the residential status of the purchaser(s) and source(s) of purchase funds.