Property Prices - Old Data Creates New Problems

Most real estate analysts and commentators, as well as the Reserve Bank, deplore the lack of real-time information on the property market. Most data is reported about four months after sales - that is, after settlement - so buyers and sellers are being guided by four-month-old information on the state of play. There may have been significant changes in that time that would influence their decision.

The lack of timeliness is not the only problem with real estate data; another is that by omitting pertinent information about properties being sold the picture is left distorted, particularly on a micro or suburban scale.

For example, house sale figures do not take into account any capital improvements. We often see Jonathon Chancellor, the property columnist in the Sydney Morning Herald, reporting how some notable paid $1.5 million for a house in 2001 and sold again in 2004 for $2.5 million '” a seeming $1 million capital gain. Speak to the vendor, however, and you will get a different story: he spent $800,000 on renovations and had to move out for six months while the work was being done. This disrupted his family life and, after allowing for stamp duty, removal costs, advertising and agent’s fees, he is a net $100,000 behind. Everyone else has done very well out of this transaction except the vendor.

• The NSW State Government collected stamp duty on the $1.5 million sale and then even more on $2.5 million.
• The Federal Government collected GST on the renovations, advertising and agent’s fees.
• The agent got his fee, which was recycled back through his business.
• The building industry benefited from the construction work.
• The banks benefited from the increased loan book; first by financing the renovation and then lending to the buyer at the increased value.

When looking at median prices, the data takes no account of the change in product. For example, look at apartments built around the lower north shore in the late 1960s. These were fairly basic units: three-storey walk-ups, built on columns with open carparks underneath. The kitchens tended to have laminated benches, a four-burner stove and a few cupboards. Bathrooms were only partly tiled, had a shower over the bath and laminated vanity top. Built-ins were not standard, and the token balcony was standing-room only.

Fast forward to 2000 and we find the kitchens have granite benchtops, dishwashers, microwaves and extensive quality cabinetry. Bathrooms (usually there are two) have granite/marble vanities, are fully tiled and have a separate shower. The apartment buildings have full security, undercover parking, large balconies, quality built-ins in the bedrooms and are possibly air-conditioned. Yes, and believe it or not, they do cost more. Does this represent a real increase in prices?

Distortions also occur in the figures for individual "hot" suburbs. Take Pyrmont: the average price of an apartment in Pyrmont in the late 1980s may have been about $200,000. All of a sudden we see the median price shoot up to $500,000. Very excited about this fantastic capital gain in the suburb, the owner of a 1980s-style apartment congratulates himself on his wise investment and calls the agent for the good news. The agent advises him that, indeed, the value of his apartment has gone up '” to about $300,000. The owner does not seem excited by this news and waves the article spruiking the $500,000 median price.

The agent tactfully explains that there have been a lot of new apartments built in the area in the past two years; in fact, most apartment sales in that time have been in these new buildings and have been for between $500,000 and $900,000. The reason for the increased price is because of the improved quality as noted previously. Only a few of the old stock have sold, as re-sales do not match the volume of new developments. Yes, and the average price of apartments is now $500,000 and would be even higher if apartments like his were not dragging the average down.

Reserve Bank governor Ian Macfarlane seems very concerned that housing in Sydney is becoming too expensive. Everyone is entitled to their opinion of value and it would appear that people who reside in Sydney seem content to invest more in their housing. At least you know it will be there tomorrow, given Sydney is not affected by earthquakes and hurricanes.

Melbourne is different: Melbourne people love dining out and dress far better than Sydney people. This presents many property owners in Melbourne with a problem: after allowing for these items they only have so much left to spend on their house, so they pay less and have smaller mortgages. In general, Sydney people have bigger mortgages, dress in board shorts and runners and eat cheaply.

Which comes to the data. There is no doubt the Sydney market bottomed six to nine months ago, after dropping 10–14%. (If you don’t believe this, try selling an apartment in a high-rise, predominantly investor-style building.) The actual figure will take a bit longer to come through and will vary depending on the type of stock currently selling in the various marketplaces. The overall market will continue to move around over the next few years, influenced by interest rates, inflation and business confidence. The data will continue to be equally as befuddling.

People who own big homes in Mosman, for example, might have been spooked by news of the downturn and are holding their properties off the market; the few sales there are tend to be the less-valuable homes. This brings down the median price, which is not a real reflection of the situation. If interest rates rise and owners at the top of the street are forced to sell, this could take the median price above where it was when the market peaked in 2003, even though sale prices are below the levels of that year.

The net result is not so much lies, damn lies and statistics but rather vendor dreaming, buyer wishing and agent glossing.