Issue 42 - Do price medians tell the truth - Jul 08

DO MEDIAN PRICES TELL THE TRUTH?

They are not good indicators of anything

All the news items about the residential real estate market, talk in terms of where the median (or ‘middle’) price is. According to them, if the median has moved up, the market has moved up; if the median has moved down, the market has moved down.
Most people are aware that, like a lot of things in life, property sales move in cycles. Sometimes sales are fast and furious and prices rise. At other times sales are slow and, in consequence, prices retreat.

At present, we are definitely in the slow sales/retreating prices stage of the market. What most people don’t realise is that the market is dropping (and has already dropped) much more than is generally thought. The median prices that everyone mentions as a market indicator are just that – an indicator and not anywhere near an absolute indicator.
As I have mentioned in previous issues of ‘Home Truths’, the median can be affected by all sorts of things happening in the housing market. In the short term, a real fall can even be masked by an apparent rise in the median price. It all depends on what is selling at the time.

In any given geographical area (a suburb or a city for example) there will be a range of different residential properties each with a value attached to it at any one time. Thus, there may be 300 properties worth $500,000 each; 500 properties worth $400,000 each; 1100 worth $310,000 each but only 10 properties worth $1,000,000 each. Let us call this range of values the ‘value profile’ of that particular suburb or city.
When properties in that geographical are sold, unless the profile of values in the population of properties sold matches closely the profile of the whole population of properties in existence in that particular area, not too much can be read into any perceived change in medians in the short term.

Over the longer term, however, there is a greater chance that the ‘sold’ profile will more closely match the ‘total’ profile and therefore the median will more accurately reflect the real change in values of the whole population of properties. It will never, however, be extremely accurate.

Clouding the issue too, is the difference between real and perceived figures for values. Thus while there may be a perceived drop in the market of say 15% in 12 months, the real drop after allowing for ongoing inflation may well be 20%, the other 5% being the inflation rate for the period under review.

But there is hope on the horizon….
Somewhere in the present housing market cycle, there will come a time where, for a short period, there will be no perceptible price movement either up or down. The market as a whole will appear to stagnate in terms of prices. But there will be other indicators.
One such indicator is already showing us that an increase is on the way – eventually. It is the rental market. Rentals are the ‘bell wether’* of the property market. An increase in rental rates will always precede future lifts in property sales prices and residential rentals have been increasing for about a year now. I believe that house prices will start to increase from Spring 2009.

Another indicator will be a sustained increase in sales volumes. Before there is an increase in prices, there has to be an increase in volumes of properties sold month on month. This is probably the first sales indicator that change will be on the way.
The Law of supply and demand tells us that while supply exceeds demand, prices will fall. When supply and demand are in balance (a state that usually does not exist for a long period) prices will remain static but volumes may start to increase. As prices are no longer falling, market perception is that they have reached their lowest point. Because of this buyers are attracted to the market in greater numbers, increased sales decrease the overhang of properties on the market and the next round of steadily rising prices is underway.

One last point: increasing numbers of Kiwis seeking their fortune overseas is going to have a direct impact on property prices as the properties that they leave behind (whether rented or owner-occupied) increase the supply side of the property mix..
* ‘bell-wether’: leading sheep of a flock of sheep, ring-leader (Ref: N.Z. Pocket oxford Dictionary)