Meaningless medians

If you want to blind property investors with science, just bombard them with enough statistics. To make a really good job of it, make sure the figures go up and down like a yo-yo, throw in a few sideways detours, generalise them to the point of irrelevance and then sell them as a definitive snapshot of what the market is doing.

Judging by the number of questions I receive from subscribers on how they go about navigating property-related data, it is no exaggeration to say that they must be feeling a little bludgeoned by what have effectively become very blunt instruments. And, nothing has a duller edge than the regular bulletins on median residential prices. These are the indicators that are supposed to tell us whether prices are rising or falling over any quarterly or annual period. So, what do they, or, more importantly, don’t they reveal?

This is particularly pertinent in a climate where the inner-urban, most in demand investor activity areas – particularly in Melbourne and with signs of Sydney following suit – keep producing what look like ever-increasing prices. However, if we look at the latest Melbourne-wide median price, it sits around $391,000.

In the year to March, Melbourne prices increased 8% across the board. But the figure is misleading; the reality for investors is that the inner-urban zone has shot up by 15–20% since the beginning of the year. These facts alone are enough to make an investor laugh out loud or scratch their heads with confusion if they use city-wide median price changes as a guide.

I often tell subscribers to do their homework on prices before plunging into a purchase. This takes patience and legwork as they need to gather three or four months worth of data on properties comparable to the ones they’re interested in. But the first, natural recourse is to data such as the median prices, which we can call up on the computer or see run regularly in the media

But, what they are in fact looking at is an industry tracking mechanism that still relies on the voluntary supply of limited data.

While state valuers-general, or their equivalent, provide us with more representative information that can show longer-term trends, the “current” figures from this source are already well behind the times when they are released. What's more, there are any number of economic and other influences that can skew these figures between the time they are collected and when they are publicly released. For example, within any of this data there is no specific breakdown of what types of property have been transacted, even if we look at the figures on a suburb-by-suburb basis.

This creates a perennial question from prospective investors about why they shouldn’t sink their money into an up-and-coming beach resort, a resources-led town, a regional hub or a trendy outer suburb that has shown a 20% plus growth rate over a short period of time. Even more dangerous is the belief that seemingly booming prices are a good reason to sell and “cash in” just because a certain location has shown a seemingly phenomenal price hike.

Sometimes, the figures can, in fact, be showing short-term new construction activity, which carries a premium price and creates an unrepresentative price bias that skews the data for a time. To get a realistic guide from median price data you must look over a long period; with short time frames there are just too many variables (see table below).

If you look at Perth, we find that back in 1990 the median house price was $97,500 and it didn’t show any increase until 1995 when it went to $125,400 – hardly an earth-shattering change. From 1995 until 2001, there was a steady climb but with none of the aberrant price spikes we’ve seen since the resources boom took median prices to about $480,000 across-the-board. It is the average annual percentage growth rates for a particular area over a seven to 10-year time frame that can provide a more reliable indicator of overall investment performance.

nAustralian median residential property values, 1995 – 2006
	1995 ($)	1996 ($)	1997 ($)	1998 ($)	1999 ($)	2000 ($)	2001 ($)	2002 ($)	2003 ($)	2004 ($)	2005 ($)	2006 ($)	Average % capital growth PA
Sydney
Houses	200,700	212,300	235,000	263,000	292,900	322,800	374,300	458,300	533,000	553,000	525,100	521,500	9.2
Units	154,300	177,400	196,000	219,500	240,600	262,800	286,000	335,500	367,300	376,300	364,600	356,400	8.3
Melbourne
Houses	144,500	152,800	175,500	195,000	227,900	249,800	296,800	327,500	367,000	366,000	358,100	373,300	9.2
Units	113,600	115,800	129,700	146,500	174,500	191,900	229,700	262,200	288,600	290,900	299,300	315,300	9.9
Brisbane
Houses	134,000	135,300	140,500	141,000	145,300	150,600	164,300	193,400	258,600	305,500	311,900	329,900	8.9
Units	107,400	127,600	128,100	147,400	155,500	163,900	164,100	174,400	201,800	235,600	252,800	276,400	9.1
Adelaide
Houses	111,500	110,000	114,000	120,300	127,500	132,600	150,200	177,300	223,300	260,800	275,800	286,300	9.2
Units	93,000	86,800	97,600	89,600	91,700	94,600	109,800	134,700	168,800	197,500	208,500	218,100	8.6
Perth
Houses	126,800	127,600	135,300	142,900	148,500	156,700	167,100	187,200	223,700	258,300	306,500	415,000	11.7
Units	87,100	87,500	92,800	98,500	107,100	114,300	123,600	147,300	180,500	203,800	244,600	323,300	13
Canberra
Houses	155,600	152,400	152,800	155,500	161,500	180,800	206,300	234,200	323,800	365,000	368,300	382,000	9
Units	122,500	122,100	122,300	128,500	131,100	140,300	156,900	197,800	264,800	289,000	302,600	304,700	9.1
Hobart
Houses	106,800	108,000	108,800	107,300	112,200	117,800	120,600	137,200	192,000	252,000	268,500	284,900	10.2
Units	88,300	84,400	77,400	79,000	85,500	88,900	88,500	95,600	148,600	192,100	209,000	225,100	10
Darwin
Houses	165,400	164,300	176,500	173,500	179,400	186,800	188,000	202,300	216,000	256,500	295,700	360,000	7.6
Units	117,700	126,600	131,200	127,200	155,600	146,600	149,800	154,800	154,900	176,300	216,100	269,300	8.3

However, we are now seeing the early signs of growing acknowledgement on the part of state real estate institutes that the “one size fits all” median price is no longer relevant and may in fact be misleading for both home buyers and investors. In Perth, prospective purchasers can now access a suburb-by-suburb price breakdown, but again they need to delve below the surface to determine the specific drivers for any given area.

In Melbourne, the Real Estate Institute of Victoria has begun to release separate medians for different sectors that in the first quarter of this year showed the inner-urban zone has topped $500,000, with middle-ring suburbs (12–20 kilometres from the CBD) listed at $368,000 and for the outer suburbs (more than 20 kilometres from the CBD) a median of $300,000.

The national body, the Real Estate Institute of Australia, is also working towards more meaningful data. But, until the industry can come up with a more accurate and timely method of gathering truly representative data, the short-term medians should be taken with a grain of salt. And, more pointedly, until we find a way of creating more frequent, timely and mandatory reporting of all property transactions, all investors and home owners will get more of the same: data that means very little to most consumers.

Property Q&A

This week I have selected questions on:

• Depreciation allowances.
• Moving within the same district.
• Investing in mining towns.
• Investing in Hervey Bay, Queensland.

Depreciation allowances

I have a rental property and I am building another. I find that the depreciation allowed on them to be a great help each year towards the running costs. This allowance is not something that you mention a lot. Is there a reason for this? Do you think there is some negative aspect to depreciation?

No, nothing negative here! I would assume that most property investors would be consulting their accountant or tax adviser on what they are entitled to depreciate. Depreciation allowances, along with negative gearing, are a major reason why many people can afford the outgoings, maintenance and holding costs on an investment property. But, like any provision of this nature, there is no simple “black and white” formula that can be applied.

The list of what depreciation allowances cover is very long and there’s an equally long list of items that are not covered. The depreciation rates also vary from item to item. You mention building a rental property. You will find there are allowances for certain kinds of construction that won’t apply to an existing, established property.

Bear in mind that you really should revisit your depreciation every three to five years to ensure you are getting what you are entitled to. For a truly independent approach, you might consider engaging a quantity surveyor who will visit your properties and draw up an accurate schedule. I am very much in favour of investors claiming all their legal and allowable deduction.

Moving within the same district

My wife and I are living in a three-storey townhouse. We propose to purchase a smaller and more level apartment and rent it as a negatively geared investment. Later, we would sell the townhouse and use some of the proceeds to retire the debt on the apartment. This would then become our principal place of residence. Both properties will be in the same area and should experience the same capital gain. Even though the negative gearing would cost, we believe the advantages of buying in today’s market more than outweighs the costs. What do you think?

What you describe is a very common scenario: downsizing to a property more suited to a retirement or pre-retirement lifestyle and using an existing property to retire debt. You indicate that you are looking for an investment performance from the apartment and negative gearing benefits and depreciation allowances will help with the outgoings and holding costs, but you don’t mention how long before you intend to move into the new home.

If your time horizon between buying the new property and selling the existing home is short – say, one to three years – then by all means go ahead with your proposal and don’t get too caught up with the new property’s investment potential because the main purpose is for lifestyle. However, if the changeover time extends beyond five years, I’d consider focusing more on investment.

There are two other issues you should be taking into account. First, because both properties will be in the same area, that does not mean they will experience the same capital gain. Many people opt to downsize within the same area because they are familiar with and attracted to the amenities or have friends, family and leisure pursuits close by. However, if it is ongoing, long-term capital growth that you are after, then the selection criteria for the apartment must be spot on.

Investing in mining towns

I'm hearing about big profits from investing in rented residential property in places such as Mt Isa. What are your thoughts?

Stories abound about “big profits” being made on residential property in areas associated with the resources boom. We saw a wave of this roll through Perth, with an influx of people seeking to capitalise on the boom. No doubt, some people who had owned properties for years – when prices had generally seen slow and steady increases over a number of years – capitalised on the sudden influx of willing buyers and higher values. However, prices have now settled to the point that low affordability is keeping many buyers, particularly first home buyers, out of the market. What you need to do is study what property prices in a centre such as Mt Isa have done over 10 or 15 years. I would suggest the perception of “big profits” comes from a speculative mindset rather than a long-term investment.

Rental shortages in these areas have been well documented, but I would not recommend basing an investment property on income alone and particularly not in an area where the local economy hinges on one sector alone. If there is any glitch in demand for what underpins the area’s economy, not only is the investor left with a property that is hard to rent, but they have not seen any capital growth ahead of inflation.

Investing in Hervey Bay, Queensland

My husband and I are about to purchase our first investment property. We are based in Melbourne, but have been advised that Hervey Bay in Queensland is a hot spot area and is tipped to boom in the near future. I have done a fair bit of research in this area, but I’m scared to invest there because it is a regional area and the closest major capital city, Brisbane, is 300 kilometres away. Do you have any advice on that region?

Sensible, long-term property investment with the aim of achieving optimal capital growth and steady rental income doesn’t hinge on the tipsters’ descriptions of “hot spot areas” or being “tipped to boom”. I remember similar descriptions about other regions that were similarly described. What you really need to research is the underlying economic base of the area. What sustains it? Is there constant demand for rental properties underpinned by a diverse economic mix, or is it based on holiday traffic?

Its distance from a major capital city rules in out in terms of commuting distance. Also examine its distance from you in terms of having to have the property professionally managed. Bring all your research back to the question of supply and demand. What types of development are planned for the area? Once something is sold as a “hot spot” you will see a great deal of new development.

New apartments, new homes, new townhouses will be subject to the same sort of developers’ price premiums that we have seen in any new developments in and around our CBDs and if they are offering rental guarantees or other incentives then steer clear of them. Also, determine how comprehensive the infrastructure is. Are there the types of transport amenities, educational facilities, health care or leisure facilities that attract a more permanent population? Don’t restrict your investment prospects to one area on the basis of some perceived “boom”.