How does the housing price statistics mislead us?
Justin Wang     Published on  05/05/20

How does the housing price statistics mislead us?

In my past videos, I mentioned that the residential market may slow down due to the COVID - 19, however, a market crash is not going to happen.

In times of crisis, people like to use the word ‘crash’. The word crash is mainly used for the stock market and it has its special meaning. However, sometimes people use the word to describe the residential market.

What is considered as a stock crash? The standard at Wall Street is that a stock price falls by 20% at the end of the trading date. The symptoms of a stock crash may include:

  1. A huge amount of stocks being put up for sell
  2. The stock price keeps going downwards
  3. The existing stockholders only wish to dump their stocks
  4. There is no new buyer entering the market, creating a downward spiral

As an ordinary person, we can see that there will be less buyers in Sydney’s residential market due to the pressure of COVID -19 epidemic.

Having said that,

  1. There will not be many owners dumping their properties to the market and sell at a loss. As for the stock market, the stock value can become zero and the company may get bankrupt. However, for the residential market, the house will not disappear, people can still live in the property and the property can still be rented out. If you are a property owner, there is no reason for you to sell the property at a loss.

2. The stock prices can go into free fall, but Sydney property prices cannot. As there is value of land, construction, and rent, that’s why Sydney property prices do not experience a steep fall. My view is that even in the worst-case scenario, as long as the rental yield can cover the investors’ mortgage and other outgoings, any crisis will not shake Sydney’s residential market.

3. There is no such phenomenon called property sell-off. The so called sell off, for my understanding, mean 50% of total stock put in market for sell. This is impossible for the residential market in Sydney.

From the above points, Sydney house prices crash is impossible. If one day, the statistics shows that in a certain month, a week or a year, Sydney house prices fell by 20%, is it regarded as a crash? This is not a crash. Why?

It is because the statistics methodologies in real estate market and stock market carry a huge difference. The statistics of stocks are homogeneous, and the amount of data is remarkably large, so it can thoroughly reflect the real market situation, but the data of Sydney residential market hold many problems.

Let me give you an example.

One year I read a data report showing that apartment prices in an area have increased by 20% in the previous year. That means that the value of my apartment in that area should rise from $700,000 a year ago to $840,000, but in fact my apartment can be sold for only $750,000. It only rose by about 7% instead of 20%. In the second year, statistics showed that the median house price in this area fell by 3%. But my $750,000 apartment can already be sold at $800,000, it has risen by about 5%. Its value went up instead of down. How did this happen? I did a bit of research for this. There were 35,000 apartments in this area, each with different age. In the first year, 520 apartments went on the market, of which 63% were newly built apartments. In the second year, 260 apartments were sold, 90% of which were over 10 years old. You may have noticed, in the first year, the sales of the newly built apartments pushed up the area median price. In the next year, the sales of old apartments pushed down the area median price.

Here we find a series of problems of statistics on median house prices.

Firstly, the statistical sample lacks homogeneity. Each house is completely different because of its built-year, size, built-quality, layout and location. For example, in the statistics of the first year, 63% of the samples are brand new apartments, and 90% of the apartments in the second year are over 10 years old, so the samples for those two years are not comparable.

Secondly, if the homogeneity of the sample is poor then the size of the sample must be very comprehensive. But compared to the total market of 35,000 apartments, 300 or 500 transactions in a year obviously cannot represent the entire market.

If the statistics of an area can have these problems, so can the statistics of the overall Sydney market? Especially in a booming or slowing market, the statistical results can be very misleading.

If the COVID -19 epidemic has a huge negative impact on our economy and society, then the market will be very different from the normal market.

  1. The seller is different; if the market is not very good, a property owner will not sell a property unless absolutely necessary. Currently, a small number of people who have to sell their properties were under financial pressure, but most of them are lacking the correct understanding of the Sydney residential market and lost confidence in the future because of mental pressure. These are stress sales. I say impolitely that those sellers are a bit silly.
  2. Buyers are different: At this time, people who want to buy only want the lowest price and take advantage of sellers. They are opportunists, not ordinary buyers. They generally offer prices that are lower than the market value they think. These people believe they are the smartest
  3.  The property is different; in a slow market, if someone wants to sell a property, most likely the property itself is not very good and the owner dislikes the property.
  4. The transaction volume is less: The statistical representation is even less accurate when the transaction volume is small. A hundred thousand transaction data cannot represent the residential market with more than 2 million properties in Sydney.

I said in my previous videos that property prices not only depend on how much buyers are willing to pay, but also how much sellers are willing to sell. When the number of listed properties is large and the number of properties sold is high, the comparison of statistical data represents the actual opinions of buyers and sellers. However, when there are little listed properties and the number of property transactions is small, the statistics cannot reflect the seller’s expected price

We can use the weekly auctions result to do an analysis. During a booming market day in Sydney, more than 600 houses are listed for auction every week. The auction clearance rate can be over 80%. But in a slow market, there may be less than 300 properties listed. The clearance rate may also drop to 40%. This shows that most landlords believe that the market price does not reach their expectation, hence, they will not sell. The transaction data at this time only reflects the buyer's price but cannot reflect the price expectation for the majority of the property owners. There are more than 2 million homes in Sydney. The sales volume of one week, the sales volume for half a year, or the even the total number of houses sold in one year cannot reflect the price expectations for most property owners.

Many people do not understand the theory that my point that the property price does not only depends on how much the buyer is willing to pay, but also depends on how much the seller is willing to sell. I can elaborate more on this in the future. Now I can tell you a golden rule. That is for the residential market in Sydney, the seller’s expectation is more important. If we understand the difference between the buyers’ price and the sellers’ pride, we will then understand this golden rule that is particularly important for investing in property.

If you see the property pricing statistics for a day, saying how much has Sydney's property prices dropped, say 20%, then you should ask yourself two questions. The first question is "Will I sell my house 20% cheaper than I expected?" The second question is "Is it really necessary to sell my house 20% cheaper?" If your answer is "N0" to both questions, then you do not need to worry too much or panic about the statistics.

The short-term statistics can only be regarded as a barometer of the market at most, and it cannot be used to judge whether the property is appreciating or depreciating. Only statistics for more than 5 years can reflect changes in the overall property value. Statistics show that on average, Australian properties change hands once every 8 years. In other words, more than half of the properties have been traded in 5 years, so the statistics of 5 years can basically represent the overall status of the market. The statistical results for more than 8 years can reflect the real changes in the value of the property.

To summarize what I said earlier, I urge everyone not to be too concerned about the various short-term statistics in the market. It has no true meaning to us. We must wait for at least five years, and even eight years to see whether our property has appreciated or depreciated.

Okay. This is all I wish to share for today. I would like to welcome everyone to subscribe to PIA Media Centre - VV Centre.

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Disclaimer: the above transcript contains information about PIA and the investment philosophies of its founder and MD, Justin Wang. The information and material are purely for information and general marketing. In reviewing this document you acknowledge and accept that no representation or warranty in any way whatsoever and howsoever is meant or intended in or from any information or material appearing at any time and you do not rely on such. Persons reading this document should always rely on their own independent advice and judgment, and further in making any enquiry with PIA or its employees the enquirer may not rely on any statement whether in writing or verbally made by any members of PIA, unless PIA confirms in writing.

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