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Price statistics in the (un)real estate market

On 23 March 2013, I noticed a couple of properties in the Manly Daily scheduled for auction. In the Sun Herald the following day, there were four pages on property with wonderful news about excellent auction clearance rates and lots of happy smiling faces. No mention of the two Manly properties.

A couple of days later, I ran into a friend who lives opposite a house in Roseville that was on the market. “Has it sold yet?”, I asked. “Yes”, she said. “Last Thursday, but they accepted less than they wanted”. Strange, I thought, I can’t remember seeing that result in the paper. So I went to the library and read through the Manly Daily, the North Shore Times and the Sun Herald for the weekend of 23 and 24 March. Here is what I found out.

According to the North Shore Times, 1502 properties were on the market with 439 scheduled for auction and 1063 for sale. In the Manly Daily, the figures were 1674 in total, 261 for auction and 1413 for sale. The auction clearance rate was 78%, which RP Data described as “auction properties that sold on or prior to auction this week.” As the auction clearance rate is widely used as a barometer for the health of the property market, the message appeared to be that the property market was getting its mojo back.

Flicking through the Manly Daily, I noted that there had been 21 auctions scheduled for 23 March, christened ‘Super Saturday’. In the following day’s Sun Herald there were 313 auction results listed. 193 successfully sold the property at auction, 79 were sold prior to auction and the remaining 41 were either passed in or had vendor bids.

Three questions sprang to mind.

First, if the percentage of properties going to auction is less than 30% of all the properties on the market, why are we looking at auction clearance rates to gauge the state of the market?

Second, if 40% of the properties included in the auction clearance rates were actually sold prior to auction, then why are they included in the auction clearance figures? I have experienced ‘sold prior’ myself. We scheduled an auction for a unit we wanted to sell. Many people inspected the property but with a few days to go, the agent told us there was really only one potential bidder. His advice was that going ahead with the auction in that environment could be disastrous. It was highly likely that no-one will bid, and worse still, the solitary prospect may realise they were the only game in town. When the agent ended up negotiating a pre-auction price with the buyer, we were very relieved. Including a sale like this in the auction clearance figures is completely misleading.

Third, how come there were only 313 auction results listed in the Sun Herald when there were 700 advertised in the North Shore and Northern Beaches alone? I was surprised to see that not one property was sold in Roseville, Lindfield, Killara, Pymble and Gordon. And none of the 21 advertised Northern Beaches auctions were listed either.

However, there was a photograph of one of the Roseville properties on page 5, under the headline “Super Saturday lives up to its name.” Next to the photo of the property were some figures: 1985 $235,000, 2013 $1.75 million, 644% rise.

Very impressive, except for two major issues.

First, the property hadn’t actually sold, it was what the vendor was hoping to achieve. And second, the current vendor bought the property for $1.89 million in September 2010. Instead of a 644% profit, if they sell at their asking price they will realise a loss of more than 12% if costs and stamp duty are factored in, assuming they did not spend any money on renovations or improvements.

So why did none of the 21 advertised Northern Beaches auctions appear in the following day’s Sun Herald? The data came from Australian Property Monitors, and they told me they didn’t receive the information from the real estate agents in time to pass it on to the Sun Herald.

Manly Daily and North Shore Times source their information from RP Data, and RP Data also supplies the Sunday Telegraph. What did the Sunday Telegraph publish, I wonder?

The Sunday Telegraph on 24 March had published over 750 auction results, more than twice as many as the Sun Herald, including two thirds of the Manly Daily auctions. In contrast to the Sun Herald, 18 of the 21 Manly Daily auctions were reported. 10 were passed in, 3 were withdrawn, 3 sold prior to auction and 2 sold on the day. That’s not my idea of a successful ‘Super Saturday’. And why did the Sunday Telegraph report more than twice as many auctions as the Sun Herald?

Eventually, all results find their way into the Valuer General’s office, and you can find out exactly how much a property sold for by logging on to various internet sites. Some of these sites try to assess what a property is worth, and sometimes they are pretty accurate. However, sometimes they are incredibly wide of the mark. For example, one of these sites had a house in Roseville valued at between $1.83 million and $1.94 million, and claimed it was a ‘good guess’. Er, not quite. Happily for the owners, it sold for $2.65 million last week.

What about the property industry’s use of median prices to measure the state of the market? The ‘median’ is the middle price with as many prices below it as above it, which is not the same as the average price. This means that the measurement of how the market is performing is entirely dependent on the performance of the few houses around the middle. This can create massive distortions in what is actually happening.

And what nobody factors in to the price performance is the cost of renovations. Not much reward from buying a house for $500,000, spending $250,000 on extensions and selling it for $800,000 a year later, but the statistics will show a 60% per annum improvement. When someone buys a Commonwealth Bank share, they don’t have to pay for a new roof on their local branch from their own pocket.

I am left with an uneasy feeling about how auction prices are recorded and reported. Contrast my findings with the availability of information about sharemarket prices and performance where bid, offer and sale prices are published instantaneously, and the entire history of selling prices and volumes is available at the push of a button. The market is regulated by the ASX, and investors are reasonably informed about what is going on.

When someone buys shares they are usually investing a relatively small amount of money in a liquid, transparent market. But when someone buys a property they are investing a huge sum of money in an unregulated marketplace that is illiquid and opaque. Residential property is the biggest asset class in Australia, worth about $4 trillion or almost three times the value of all listed companies. Buyers and investors deserve a better understanding of what is actually happening with prices.

 

3 Comments
peter
April 06, 2017

The real estate market is a swamp, and it is getting worse, not better. The examples agents provide of price escalation over time are thoroughly misleading.
In our case, we bought in 1985 for $147,000 and would receive about $2.6m today. That's a compound increase of 9.3% which an agent would quote. No mention of the stamp duty, rates, repairs, insurances over 32 years, or the $900,000 we spent knocking the old place down and rebuilding 10 years ago. Better beware!

Adam Furlonger
August 12, 2014

Despite the recently strong market conditions in many parts of Australia, almost 80% of home sellers are turning their backs on auctions and benefiting.

But there are still many sellers who don’t realise, until it’s too late, what happens to them at auction.

If someone is trying to talk you into selling by auction, then before you sign anything, read the following six reasons why auctions will NOT get you the highest price for your home.


1. Reserve Price

This is the lowest price a seller is prepared to accept. There is no procedure at an auction for determining the highest price the buyer will pay. Only the highest price of the losing buyers may be known because they stop bidding once they reach their limit. But the buyer who is the highest bidder often buys at less than his or her limit.

2. Repels Buyers

Research shows that more than 90% of buyers do not like auctions. The highest paying buyers may avoid the auction.

3. Inconvenient

One of the basic rules of marketing is make it easy for people to buy. Auctions do not make it easy. They make it hard.

4. Bargain Hunters

Investors, developers and property dealers often buy at auction because they all know that auctions are one of the best places to find cheap deals. But they almost NEVER sell at auction. You will not find many real estate agents selling their home at auction either.

5. Comparative

By making the negotiation public instead of private, buyers have an advantage over the seller. Instead of having to offer their highest price to win the auction, buyers only have to outbid the buyer below them.

6. Failed Auctions

When a home does not sell at auction it is labelled a failure and buyers will offer lower prices. They are easy prey for bargain hunters.


These are just some of the seasons why auctions get lower prices.


Adam Furlonger

Michael Hill
April 13, 2013

Thanks Rick, a good article.

It highlights a number of concerns for me about a market characterised by mis-information, deliberate obfuscation, participants (newspapers / advertisers) that are innately conflicted, too many intermediaries as evidenced by the excess rents (profits) they are able to extract simply for standing between buyers and sellers, unequal access to information between vendors and purchasers, and of course, the old favourites, ineffective self-regulation, unenforced industry drafted codes of ethics and very effective lobbying for the retention of the status quo and to maintain barriers to entry!

Sigh, we've seen so many other financial markets improve their transparency and disclosure, drive down transaction costs and enhance market efficiency. Will the real estate sector ever enhance accountability and visibility and move into the 21st century?

 

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