The great Auckland property divide

by Alistair Helm in


As the topic of affordable housing continues to capture the headlines; the statement is so often made that Auckland is one of the least affordable places to live in the world. Now I don't propose to debate this question, outside of making the point that if house prices were unaffordable, as in truly unaffordable; then the demand would shrivel up and price expectation would adjust accordingly. Now I know this is a simplistic statement, and the fact is that property prices have more than doubled over the past decade pricing many out of the market. However the fact remains that every day 60 properties are bought and sold across Auckland at a median price of $835,000. By comparison I see that the average advertised price for all property in Great London is now NZ$1,169,000 and in Sydney the sale median price is now NZ$1,225,000. The common link is that all 3 cities are centres of innovation and economic growth and are the leading city of their respective country. It is also not surprising that all three cities are simultaneously experiencing house prices falling, such is the connectedness of global property prices.

This current median price of Auckland property of $835,000 is 84% higher than the median property sales price outside of Auckland, where the latest median price is $455,000.

I was curious to see how this premium for Auckland property had tracked over the past couple of decades to see just how relatively unaffordable Auckland had become in domestic terms and thereby provide insight into the property price divide between Auckland and the rest of NZ.

I have chosen not to use median price as the metric for this analysis. As I have mentioned in preceding articles my favoured measure is the Stratified Price Index provided by the Real Estate Institute. This is in my opinion, the most accurate measure of house sales price for comparative purposes.

So this analysis is presented in the chart below, it is to my way of thinking quite enlightening. At this time based on the price index Auckland is trading at a 95% premium to rest of the country. Three years ago the divide between Auckland prices and the rest of NZ peaked at 128%, with Auckland more than double the price in the rest of the country.

The Auckland divide of house prices comparing Auckland with the rest of NZ

The historical perspective is very interesting. Back when data was first reported by the Real Estate Institute in 1992, property prices in Auckland were 40% above that of the rest of the country, through the mid 90's that shot up to 80% premium, a level that was pretty much sustained through until the end of 2013. Then began a surge in prices outside of Auckland, at a time when Auckland prices were certainly rising. This pushed the divide down to just under 50% at around the start of the GFC.

The next 7 years from 2008 Auckland went on a relative rollercoaster ride as compared to the rest of the country driving the divide from 50% up an ever accelerating steep curve to top out in 2015 at that level of 128%.

Given the current picture of property prices outside of Auckland compared to Auckland it is very likely that the divide will continue to fall in the coming year reducing the Auckland premium from 95% closer to 75% / 80%.


Quarterly Property Review for NZ outside of Auckland - Q2 2018

by Alistair Helm in


Quarterly Review logo.png

As I have commented recently, I've made a conscious decision to cease to produce data analysis on what is seen as the "NZ Property Market" - the fact is this aggregation is really no longer as relevant, given how distinct the property market is between Auckland the rest of the country. So this is the first of what will be a quarterly report for the aggregation of property data for areas outside of Auckland, complementing the separate report for the Auckland market.

The brief overview of the property market outside of Auckland based on data up to and including July, shows a relatively healthy market with good clearance rate, sales volumes fairly static at a strong level, with prices continuing to rise with mid single digit year-on-year growth.


Volume Sales

From a volume sales perspective - annualised volumes are steady at around 52,000, a level that has been consistent for around 9 months. The past 4 months has seen a very slight increase but not enough to yet call it a upturn. This level is down 16% from the last peak of sales which was close to 2 years ago, far less than the fall seen in the Auckland market which was 37% from peak.

NZ property sales excluding Auckland 10 yrs to Jul 2018

When seen as annual variances in monthly sales, the picture shows modest rises in sales comparing each month with the same month in prior year with barely a perceptible trend up or down.

Property sales for NZ exc Auckland 2000 to Jul 2018 variance yr on yr

Pricing

In terms of pricing the median sales price over the the past quarter has marked time at the $455,000 level. Back in March the median price peaked at $460,000 and subsequently it has bounced around that level but not as yet exceeded it. The chart below tracks the year-on-year variance of monthly median sale prices over the past two decades, showing as it does how consistent property price appreciation has been over this extended period.

NZ median sale price property excluding Auckland 2000 to Jul 2018

Clearance Rate

I am very keen on this relatively new metric of the clearance rate as a tracking tool for the trends in the market. It is measured as the rate of sales against the rate of new listings - think of it as the available stock in a warehouse - if your clearance rate is below 50% then you will suffer the pressure of overstock and will need to adjust prices down to clear inventory. The opposite with a clearance rate of over 50% indicates strong demand which can create price inflation.

As you will see from the chart below the clearance rate for NZ properties outside of Auckland is edging up, as it has been for most of this year so far. The point about clearance rate is that it is all about relative market activity so whilst sales are almost static this is matched to static new listings, within this market dynamic, the properties being listed are being sold at an ever increasing rate; and as the chart shows clearance rate tracks to a pretty close correlation to price inflation. It is also worth comparing the clearance rate outside of Auckland with that in Auckland. Auckland clearance rate is currently just 55% as compared to outside of Auckland at 68%.

Clearance rate of NZ property excluding Auckland tracked with median price movement 2008 to Jul 2018
 


I have added a modified version of the clearance chart below prompted by a comment from John - he was questioning the uneven scale range between price movement and clearance rate. I have used the 50% clearance rate as the midpoint and then adjusted the upper level to +25 percentage points as per the price movement and equally -15 percentage points to the lower level.

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The Auckland Quarterly Property Review - Q2 2018

by Alistair Helm in


Quarterly Review logo.png

A bit later than planned here is the quarterly report. I've included the latest July property data to produce this analysis of the Auckland property market. As I have commented recently I've made a conscious decision to cease to produce data analysis on what is seen as the "NZ Property Market". The fact is this aggregation for all NZ property data is no longer as relevant, given how distinct the property market is between Auckland the rest of the country. That is why I will produce a quarterly report on Auckland and another one on New Zealand outside of Auckland.

The picture of the Auckland property market now with the benefit of a further 4 months data since the last report is showing a market in the doldrums. A situation that is actually quite uncommon from a historical perspective as compared to the rollercoaster that typifies the Auckland market.


Volume Sales

From a volume sales perspective - annualised volumes have remained at the level of 21,500 for virtually all of the past 9 months with just the vaguest sense of an increase in the past 2 months. Remember this is annualised sales so there is no seasonal factor to explain any movement. This level of sales remains at levels reminiscent of the post GFC period of a decade ago, far from the peak activity of 3 years ago. The decline since that time is significant 37% less sales. 

REINZ_CORE_MONTHLY_DATA_xls__-__Compatibility_Mode.png

When seen as annual variances in monthly sales the same visualisation of the market in the doldrums is reinforced. The typical cycles of the Auckland property market usually see a seesaw rise and fall, whereas the recent period has the appearance of a market just marking time; deciding if the next move will be up or down, almost mirroring the recent proclamation of the Reserve Bank Governor.

Q_A__Will_house_prices_really_slump_.png
REINZ_CORE_MONTHLY_DATA_xls__-__Compatibility_Mode.png

Pricing

In terms of pricing the median sales price over the the past quarter has similarly marked time at the $850,000 level, although July saw this slip down to $835,000. It is now fully 18 months since the Auckland market topped out at $905,000 - subsequent months have seen prices bump around between a low of $820,000 and a high of $880,000. The chart below tracks the year-on-year variance of median sale prices over the past two decades.

Auckland median price movements 2000 to 2018

Clearance Rate

I am very keen on this relatively new metric of the clearance rate as a tracking tool for the trends in the market. It is measured as the rate of sales against the rate of new listings - think of it as the available stock in a warehouse - if your clearance rate is below 50% then you will suffer the pressure of overstock and will need to adjust prices down to clear inventory. The opposite with a clearance rate of over 50% indicates strong demand which can trigger price inflation.

As you will see from the chart below the clearance rate for Auckland is edging up, as it has been for most of this year so far. The point about clearance rate is that it is all about relative market activity so whilst sales are almost static this is matched to very low new listings, within this market behaviour the property being listed is being sold at an ever increasing rate and as the chart shows clearance rate tracks to a pretty close correlation to price inflation. 

NZ_Property_Report_monthly_data.png

So just maybe the Reserve Bank Governor was righter than he thought when he stated that there was as much chance that property prices would rise as they would fall!

 


Do house prices quadruple every 20 years?

by Alistair Helm in


No sooner had I written the article "Do house prices double every 10 years?" than I get the question posted on LinkedIn as to whether house prices quadruple every 20 years?

My first reaction was - No Way, if they double in 10 years, how could they possibly quadruple in 20 years? - to be clear $100 doubling in 10 years becomes $200 and within 20 years quadrupling to $400. But then I remembered the good old adage of compound interest. The annual rate of growth to double a sum of money in 10 years is 7.2% and that same 7.2% annual growth rate compounded will quadruple the original sum within a 20 year timespan.

The next question for me was to Google the question, just as I did with doubling house prices, not 339 million results this time just 8 million. But top of the results from The Telegraph in the UK with a 2003 article stating just that fact. Between 1983 and 2003 average house prices went from £29,993 to £121,742 – a quadrupling. As an aside I bought my first house in the UK in 1984 for £22,150 so I can confirm that is what a typical house cost back then. I sold that house in 1985 for £20,650 so clearly I should have waited!

Anyway I digress. Back to the question posed on LinkedIn. Given the fact that NZ property prices have doubled during some 10 year periods, have we seen quadrupling over any 20 year period?

The answer is yes for Auckland but not for the rest of the country in aggregate. I have only been able to assess the period from 2012 as the available data from REINZ of sale price data only goes back to 1992. Here then are the same charts I used in the prior article adapted to track each 20 year period from 2012 to 2018.


NEW ZEALAND - ALL PROPERTIES

Analysis_of_NZ___Akl_pricing_since_1992_HPI___Median.png

So for the period from 2012 onwards the 20 year rise in house prices across all of NZ was an average of 237%, that is over a three fold increase but at no time has a quadrupling been experienced. Of note is the fact that the current period June 1998 to June 2018 at 271% is the highest ever 20 year rise.


AUCKLAND

Analysis_of_NZ___Akl_pricing_since_1992_HPI___Median.png

In the case of Auckland the average 20 year period price rise has been 296% between 2012 and 2018. In 31 of the 78 months the 20 year rise was more than quadrupling of prices in that 20 year period. The highest ever rise was for the period from August 1995 to August 2015 which saw a 329% increase.


NEW ZEALAND EXCLUDING AUCKLAND

Analysis_of_NZ___Akl_pricing_since_1992_HPI___Median.png

For the rest of NZ excluding Auckland the average 20 year price growth has been 197%, so just under a trebling of prices over a 20 year period. Of note though is the steady rise in the price rises since 2015 with the latest month of June recording a 240% increase in prices since June 1998.

 

 


Do house prices double every 10 years?

by Alistair Helm in


It's a fairly commonly held belief that house prices double every 10 years.

Is is correct? can it be guaranteed? and is there fact to back up the assertion? In researching this question, I found that asking the question on Google "Do house prices double every 10 years" provides a pretty comprehensive pedigree of search results, 339 million to be exact.

Among the top results I found that, an Australasian report by Core Logic which analysed the two 10 year periods from 1996 to 2006 and from 2006 to 2016. The earlier period did see consistent doubling (or more) of house prices across the major metros, whilst the later period only saw a doubling in Melbourne whilst Sydney managed a 78% rise.

The UK has similarly experienced doubling in house prices over 10 year periods with an excellent analysis by Alex King providing facts adjusted for inflation covering many decades.

Before diving into the NZ data, it is worth reminding ourselves of the mathematical fact that for a sum of money to double in 10 years requires an annual compound interest factor of just over 7%.


New Zealand - Total All Properties

Using the REINZ House Price Index as the measure of house sales price tracking back to 1992 I have created this chart below to best answer the question - do house prices double every 10 years? Simply viewed each bar represents the rise in prices for a 10 year period.

The black horizontal bar shows the 100% increase threshold. It can be very clearly seen that from October 2003 right through to November 2011, (with just a short period in 2009) property prices doubled, comparing a single month with the same month 10 years ago. The peak rise in any 10 year period was around mid 2007 (just prior to the GFC) when 10 year price rises topped out at just below 120%. 

The period since the end of 2011 though has refuted the claim of doubling prices every 10 years. Over the past 7 years, 10 year growth has been well shy of doubling, achieving around an average of 65% growth in each 10 year period.

Across the 26 years (198 months) the average 10 year rise was 88% with the median rise in any 10 year period 97%. Over that 26 year period just under half the time (43%) saw prices doubling or more


Auckland

So what about Auckland, the leading metropolitan region of the country? - most of the media portray the Auckland market are constantly bubbling and among the most expensive cities to live in. What does the data show?

This chart is certainly illuminating and somewhat surprising. Compared to all of NZ, Auckland has sustained a relatively consistent higher 10 year growth in prices with an average 10 year growth of 98%, well ahead of the NZ total at 88%. However the periods during which a doubling was seen were fewer and not aligned to those of those of total NZ. In just 72 of the 198 months was a 10 year doubling witnessed - less than the 85 for total NZ and the highest 10 year rises where in early years of the new millennium and the recent boom cycle.


Total New Zealand excluding Auckland

If you extract the Auckland price rises from New Zealand in total you get a very different answer to the question - do house price double every 10 years?

During the period of 2005 and 2008 in the run up to the GFC the 10 year respective rise 10 years later as seen between 2015 and 2018 property sales prices outside of Auckland would be barely 40% which is an equivalent rate of 3.4%, certainly ahead of inflation but probably below the prevailing mortgage rates for the period.

So can it be said that property prices double every 10 years? - clearly not; as to make such a statement is always made assuming the past is the best indicator of the future which we all know is wrong. However it would be true to state that in the case of Auckland that over the past 20 years property prices have pretty much consistently doubled every 10 years as the median 10 year rise is 96%. 


Subsequent to writing this article I was asked via a question on LinkedIn as to whether property prices quadrupled over a 20 year period. I had not heard such an assertion, however upon Googling I found it was quoted as a fact. So I naturally went and did the analysis and then wrote this article - Do house prices quadruple every 20 years?


How would you select an agent to sell your house?

by Alistair Helm in


Survey Research.jpg

This was the question I was eager to answer when last month I undertook a survey to find out from people who had sold their house using an agent. The reason for undertaking the survey was twofold. Firstly for very selfish reasons I wanted to better understand the approach that I would need to take to be a successful agent; and secondly I have often written about the value that agents provide and I felt that the survey would go some way to validate these assumption.

The survey was undertaken online and was promoted through this site, my personal database, as well as some degree of Facebook promotion. The survey was just 8 questions long and was anonymous. The survey resulted in 60 completed questionnaires. I would naturally have liked to get a couple of hundred responses but given the specific requirement that participants would need to have sold a property through an agent in the past year or two and without the mechanisms of a large research company, I am comfortable with the scale of the survey. I make this statement up front so as to ensure that there is clarity that statistically this sample size does inherently have large margins of error.


The Results

I will go through the results for each question in the sequence that the questions were asked, providing the objective data as well as my comments and interpretation of the results for each.

 

Question 1 - How did you decide which agent to use?

Agent_Selection_-_full_data_reports_June_2018.png

Facts: The overriding opinion of those surveyed is that they selected an agent based on personal connection. The most common factor was that the agent was the recommendation of someone they knew. The 3 leading results all speak to a connection or experience, either first hand or through a trusted recommendation.

Online research continues to grow in importance as our lives are so normalised in our behaviour to seek answers online and so this choice came in 4th place. Equally the physical presence of an agent through adverts and signboards do inform vendors. However clearly unsolicited letters and flyers appear to have little impact.

My opinion: These results are not surprising when you reflect as I have done over the years, that the true value of an agent is the personal connection that provides you as a vendor with a consultant, an advisor, a sounding board, a confessor as well as a negotiator, marketer and influencer. This speaks to the heart of the real estate process which relies heavily on trust. The key dividing line is the need to have a connection that brings trust and respect but equally establishes a clear professional detachment. An agent is not there to be your friend, they have a job to do, and have legal and fiduciary obligations to you and the buyers as defined by law.

The results also speak to the challenge for new agents – advertising your presence plays a part in building awareness which is so important but without the track record of working with clients this presence offers little until you secure a client who can then become a referral. For the new agent the response on the survey that shows real value is the digital presence to be found when prospective clients go searching for an agent.

 

Question 2 - Which real estate company does the agent work for?

Agent_Selection_-_full_data_reports_June_2018.png

This question was included more as a validation of a representative sample. The results show the largest respondent group was using Barfoot & Thompson. This  does show a degree of Auckland bias as a representative sample of all NZ would probably see this around figure at around 15%.

Harcourts at 13% is a degree under-represented and Ray White at 22% slightly over-represented. Amongst the others were a mixture of regional operators and boutique operations.

 

 

 

Question 3 - When you chose your agent, to what extent did the real estate company's reputation and brand influence the decision?

Agent_Selection_-_full_data_reports_June_2018.png

Facts: This question is pretty clear cut. Vendors choose the agent.

The company they work for; the brand that sits alongside them has a bearing, but in only 1 in 8 of those surveyed did they state that the company was critical; whereas over 8 out of 10 said the company was of little importance or not important at all.

My opinion: This comes as no surprise. The facts are there for all to see, well established real estate agents that move between brands don’t skip a beat in regard to business – the business follows the agent. Agents are the brand, and building and curating that brand is so critical to the success of every agent. There is no doubt though, that a new agent does leverage the company to establish a credibility and support. There is a symbiotic relationship between agents and real estate companies.

 

Question 4 - Did you just select an agent,  or did you ask a number of agents to come and appraise the property?

Agent_Selection_-_full_data_reports_June_2018.png

Facts: Half of respondents stated that they chose their individual and went with that choice without reference to any other agent. Half of respondents decided to interview more than 1 agent.

My opinion: I find this fairly predictable given the answer to question 1 – recommendation or first hand knowledge is largely driving the decision, so it would follow that that person would be appointed, as against the process of assessing a number of other agents.

 

 

Question 5 - If you chose to invite a number of agents to appraise your property and present themselves, how many did you invite?

Agent_Selection_-_full_data_reports_June_2018.png

(Ok - I know this result seems to be at odds with question 4 which said that half of survey respondents chose their agent without interviewing other whereas this question now says that this was just 40%. I guess this is one of those issues with survey questionnaires. In retrospect I should have designed the questionnaire better to have conditional questions, my apologies.)

Facts: Whilst 4 out of 10 of those surveyed said that they stuck with the one agent they selected, the majority of those surveyed – 6 out of 10 decided to invite more than 2 and nearly half invited 3 or more.

My opinion: This is the question I was in some ways most interested in. Personally I believe this should be the case when choosing an agent. Property owners should take the time to review a number of agents. Selling a property is a major event and given it is undertaken on such an infrequent basis I believe every property owner should select a group of agents and request they make their pitch to win the business, but also to win the trust and confidence of their future client.

The pitch to win the business should clearly separate the appraisal (the market valuation), from the marketing strategy for the property, from the profile of the agent. This process would allow the property owner to get a sense of who they think they can work with best to facilitate the sale, and which agent has the right manner, approach and capability to succeed to extract the value that resides in the property in a successful outcome.

 

Question 6 - In choosing your agent what do you think were the most important factors in selecting that agent?

Agent_Selection_-_full_data_reports_June_2018.png

Facts: The top 3 attributes all related to professional capabilities. Likewise at the other end of the spectrum incentive based choice ranked consistently lower.

My opinion: These results again are affirming of the ideal objective process. Choosing an agent based should be based on capability and personal confidence, not being swayed by incentives. However in my few months of experience now at the front line of this industry I have heard (as yet not experienced first hand) agents loosing out in competitive situations to the practice of competing agents 'buying listings' (appraising with a high price to play to the vendors greed) or competing agents offering free marketing or heavily discounted commission.

Now I'm a pragmatist and at the same time I have been a vendor several times over the past couple of years and it is my view that hard earned income should always be wisely spent, and I certainly have never wanted to spend more than I needed on products or services. However I am the first to recognise that when someone heavily discounts a service you have to wonder if the service will match the value. Additionally when it comes to marketing there is no such thing as 'free'. Marketing is core to the process of selling a property and it has to be considered as an investment, the more you put in the greater the output - ideally that being in the outcome of multiple competing buyers attracted to a beautifully presented property, some being motivated to buy even though they were not actively looking; rather than just selling to the current active buyer in the market.

 

Question 7 - Did you research the agent online before appointing them? - if so which sites

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Facts: Three quarters of all survey respondents researched the agent online before they appointed them.

There is a clear focus to review the agents own website and the real estate companies website, not surprisingly Google comes a close 3rd to those top two choices. As to the use of property portals Realestate.co.nz and Trade Me are represented well, however Homes.co.nz should feel well please with an 7% - one in 14 respondents used this service to research agents. The level of just 8% who researched the Real Estate Authority agent register is low at just 1 in 12 - its main purpose though is to verify the license for the agent and to highlight if any substantiated complaints have been made against the agent.

My opinion: I think it is encouraging to see 75% of respondents undertaking research online. The bias though is to search the agents' own marketing platform which certainly provides a profile, however it tends to heavily skew to current listings and a portfolio of prior sales. This information is useful but I sense there is more that people could find out of value about an agent using more independent platforms. In saying this I am alluding to LinkedIn; at just 12% this platform's share of research is very low. Selecting an agent should be thought of as recruiting an agent to undertake a job - sure the job may only last a month or so, but in the scheme of things it is a recruitment for a role. No recruitment agent in today's world or employer for that matter would not undertake a LinkedIn search for a candidate profile, so it should be for real estate agents.

Interestingly amongst the 'other' options in the survey question, a single respondent did said Facebook.

 

Question 8 - At this stage of the sale process how would you rate the service you have received from your agent on a scale of 1 to 100?

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Facts: The median rating of the service of the chosen agent was just on 8 out of 10.

My opinion: As some one offered in responding to this question, the better question might have been more refined as to "how you would rate the service you received from your agent, as against your expectation at the start of the process". This was a very good point and may assist in interpreting this result.

Is 8 out of 10 good? or should it be 10 out of 10?

I think any service based relationship that involves a complex and emotional interaction of such significance and risk will lead to tested interactions. This is only to be expected. If an agent acts professionally, more so in today's far more challenging property market, then a result of 10 out of 10 on a survey of 60 respondents would be unrealistic and show the survey to be flawed or biased. I think 8 out of 10 is great. 

The distribution chart above though is illuminating. Fully 90% respondents gave a score at 5 out of 10 or above. The big question lies in those 6 respondents who rated their agents below average (below 5) and the single respondent who rated the agent a 1. I would hope that these respondents shared their feedback with the agent. We all need feedback, people hate giving it but in a service based business we need it more than ever, especially in a profession where trust is so key and referral business is so critical to success.


Update 

Since publishing this article earlier this morning I have had a number of emails all asking the same question "What would you do differently now you have these research findings?"

The short answer I would change nothing. I guess the reason for undertaking the survey was to affirm my feelings or intuitive sense of the process. I remember from my early years in product marketing it was drummed into me that you should never do any research unless you had an outcome or hypothesis you wanted to test. So I tested the hypothesis and proved that my suspicions were correct. As a new agent you need to build your brand and work hard to make connections. The analogy that has come to me is of an old fashioned London bus - those ones where there was an open platform at the back so you could jump on and off. The bus is full of prospective sellers and equally a large number of experienced agents who are all engaging with vendors. I am the guy trying to grab hold of that rail as the bus speeds along - hoping I can hop on and get a chance to pitch my offering; there are many buses but they are all speeding along and I don't want to break my arm trying to hop on board. 

 


The property market cycles of the past 25 years

by Alistair Helm in


When property prices are on the rise, the commonly asked  questions are usually based around how long can this bull run last?; are we in a bubble?; or have prices become disconnected from reality?

All are fair questions. However what is really interesting is the fact that these questions tend to float to the surface of the media precisely at the end of a property cycle. Property cycles are a historic part of the property market, here in NZ and globally. These cycles tend to last around 5 years and represent periods of either stagnant growth, accelerated growth and in some case declines.

In an article I wrote a few months ago I isolated the key periods of the property market identifying 5 periods tracking the median price data provided by The Real Estate Institute for over 25 years. Those 5 periods comprised 3 periods of rising prices and 2 of plateauing prices. The chart below reflects this perspective.

Interestingly I was sharing this insight the other day to a group of real estate colleagues as we reviewed the state of the current market. We are currently in a plateau phase - certainly in Auckland. The question I was asked of this chart, was as to the relative rate of increase during each of these periods as there is a perspective that property prices grew faster in the recent 5 years as compared to the 2002 to 2007 period and certainly as compared to the 1992 to 1997 period. I pointed out that this chart can be deceptive. The representation with a vertical axis of the actual median price can be misleading as a 100% increase from $100,000 to $200,000 as was the case in the 90's represented a dollar rise of $100,000; however a dollar rise of $100,000 in say 2008 from $350,000 to $450,000 only represents a 29% increase.

This got me thinking as to whether there was a better way to represent the trends of these cycles.

A couple of hours work has brought me to this new analysis of the property market cycles of the past 25 years.

Firstly I have chosen to use a different data set from The Real Estate Institute of New Zealand for analysing the market. I have chosen to use the House Price Index (HPI) - this data set is probably the most reliable and accurate data set for property sales prices in NZ. The Index which was developed by REINZ in cooperation with the Reserve Bank of NZ ensures that this price data set is not effected, as it can be by composition changes. That is to say if in a month a higher proportion of sales occur in a relative price band or suburb set this can skew the median price which is the most common and trusted method of sale price calculation.

I also decided that I would analyse two data sets namely Auckland, and NZ excluding Auckland. The fact is a single NZ data set is itself a compositional skewed data set as Auckland being c.40% of the market heavily skews the National picture which then becomes irrelevant for properties outside of Auckland. (More of this is a future article).

The chart below tracks the House Price Index from 1992 to date, for the data set of Auckland and Total NZ excluding Auckland. The Index is centred in 2003 at 1,000 points with dates before that being below 1,000 and dates afterwards being above 1,000. A figure of 1,100 represents a 10% increase over the base month in 2003. A figure of 2,000 being a 100% increase over the base month in 2003 and so on. The latest HPI data from REINZ for May 2018 had an Index of 2,883 for Auckland and 2,554 for all of NZ excluding Auckland.

This chart is very illuminating as it shows very clearly the plateau the Auckland market has been experiencing since reaching 2,800 in August 2016 - nearly two years ago. It also very clearly shows the extent to which the Index for NZ property sales price excluding Auckland shot away in the 2003 to 2007 period. The index to 2003 though in someways confuses the visualisation. I therefore decided to recalibrate the index it back to 1992, as the revised chart shows below.

Now back to that opening question - what are the key cycles of the property market of the past 25 years and how similar or different are they?

Here is a more detailed analysis of the price index data I have concluded upon for which I have identified not 5 but actually 7 phases of the property market over the past 25 years.

Now before you email or call me to ask what on earth I have created, let me explain. I have taken the HPI data and broken it up into these 7 periods or phases of the past 25 years which are tracked along the horizontal axis from 1992 to 2018. For each of the 7 phases I have identified the inflection point and recalibrated the start point to zero. So let me walk you through the 7 periods to help explain.

Period 1 - January 1992 to February 1993

Just a one year period which saw the price index grow by just 7% for Auckland and 7% outside of Auckland. This is subjectively an odd data set as there is no record of what happened pre-1992 and especially from the after affects of the stock market crash of 1987. Best to disregard this phase.

Period 2 - March 1993 to March 1996

Now this was a period of significant price growth. Auckland price index leapt 68% in just 3 years whilst outside of Auckland the price index went up 22%. This 3 year rise of 68% in Auckland is the fastest rise that has ever been seen over the past 25 years.

Period 3 - April 1996 to January 2002

This period of close to 6 years included the Asian Financial crisis and saw property prices stagnate. By the end of the period Auckland price index had risen by just 10% and the rest of NZ excluding Auckland 12%. Twice during that period Auckland prices dipped. By 5% in the first few months after April 1996 and then again late in 1998 dipping by 3%.

Period 4 - February 2002 to November 2007

This would be viewed by many as the most explosive period of property price growth. In the five and a half year period the property price index for NZ excluding Auckland more than doubled, rising 116%, far outpacing the rise in Auckland of 89%. All of this of course foreshadowed the GFC.

Period 5 - December 2007 to December 2009

For a full 2 year period the property market went into a funk. Prices went down. A scenario that many thought would never happen just a few years earlier, however property prices will at some point, just as with all assets; go down in value as much as they may go up. For Auckland the price index slipped 12% in the first 12 months before easing back to be down 3% by the end of the second 12 month period. For outside of Auckland the level of price fall was less severe, down 9% in the first year before clawing back half of that to be 5% down after 2 years.

Period 6 - January 2010 to January 2013

A full 3 years in which property price index rose just 2% outside of Auckland, spending the first 2 years underwater adding to the prior 2 year period making a full 5 years when properties collectively outside of Auckland failed to recover the peak they had attained in late 2007. For Auckland the recovery from the GFC came earlier with this 3 year period seeing a modest sustained growth up 18% over the 3 years.

Period 7 - February 2013 to date (May 2018)

This current 5 year period may in later years be revised to a 4 year period ending in August 2016 when Auckland's property price index peaked up 70% in that period of three and a half years, close on the same rate of growth seen back in the '93 to '96 period. At the same time for properties outside of Auckland the price index keeps rising, up 49% over this 5 year period, the second highest rate of growth of the past 25 years.

So in conclusion, property markets move in cycles and these cycles lead to price movements. It is likely, based on historical evidence of the past 25 years that we are in, or will be shortly be entering a plateau phase, typically these periods can last from 3 to 6 years dependent upon the background economic circumstances. As to when this period started, in the case of Auckland we may already be 2 years into it. In the case of the rest of NZ it maybe that we are about to see this plateauing start very soon. If there is any silver lining it should be seen that a correction that sees property prices fall is less likely and with a strong economy we are likely to see property prices take off again within the next decade. The only certainty is that it is almost always impossible to identify the infection point until after the event !


The challenges facing a new real estate agent

by Alistair Helm in


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I’ve been a fully licensed real estate salesperson for 3 months and I thought it would be interesting at this point to share my thoughts, experiences and insights. Valuable, I hope for others who may be thinking of embarking on this career path and also potentially a valuable reflection piece for those already established in this industry.

The fact is real estate is tough. There is a saying I remember from years ago and echoed at a recent training session “Real estate is simple, but by no means is it easy” – it is true; if a little overly simplistic. The fact is real estate in 2018 is a detailed process-based business with a high degree of legal requirements and obligations, more so each year. As I stated in an earlier article tracking the process of studying for the Certificate in Real Estate, there are 30 Acts of parliament that are studied on the course and all potentially have a direct impact on this process and need to be understood and adhered to by all agents.

However, long before you ever get close to talking to a buyer or seller and providing any form of service, the life of a newly licensed real estate is all about building a profile and making an impression so you can be seen at least as relevant. It’s all about building a brand. This is so key. The hard truth of this industry is that there is no shortage of real estate salespeople. Nowhere around the country is currently underserved by a real estate agent; and in the main cities there will be tens of capable, experienced and competent agents ready at the drop of a hat to list a property for sale. So this is the highly competitive marketplace into which you need to launch yourself and create a point of difference, and even before that, just get to be seen and known.

Real estate is a numbers game and in general terms the numbers (the odds) are not great. At any one time there are probably around 20,000 people in NZ actively involved in selling their home, that’s less than half a percent of the population – 1 in 200. However this group who are easy to target are not the audience you want to reach out to and engage in order to succeed to gain a new listing.

The target audience you want to address are the people in the stage before that. A very short window in which people who have possibly been looking to buy, get that confidence to say “right let’s going, let’s get our house on the market and let’s buy that new property” – I suspect that audience is fewer than 1,000 any one time and  with 14,000 agents in NZ today ready to serve that market that’s a highly competitive environment for a new agent to take on well-experienced and established operators. Imagine trying to identify that target audience in your local area, you are talking about a needle in a haystack; 1 person in 4,700 – virtually impossible. What you have to do is rely on connections and engagements. That is why agents constantly reach out through networks, make new connections, market extensively and make proactive approaches to everyone in their local area. For unlike established agents, new agents have no referral network of previous clients to rely on for future work or referral.

In my case from the outset I chose to focus and leverage on two clear points of difference when compared to my well established local competitors. These were my analytical capability focused on local property market trends and insights; matched to my unique and extensive experience in digital property marketing. That was the easy part, the hard part was to communicate these capabilities and break through the paradigm that sees people use the same agent time and again or rely on agent's presence (existing listing stock) as the arbiter of the decision of which agent to use.

As I will highlight in a forthcoming article this decision making process in selecting an agent, based on a survey I am currently undertaking is heavily skewed to established agents.

To substantiate my analytical capability of the local property market I am writing and publishing a hyper-local property report for Devonport each month. I maintain a detailed database of property listings and sales, enabling me to publish this report early in the month. This initiative is already bearing fruit with a growing subscriber base for the full email version of the report which enhances my brand awareness and my role and is supplemented through the publication of the abridged report in the local fortnightly local paper The Flagstaff.

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However passive marketing is as ever, a slow build. The massive hurdle that needs to be overcome to really kick-start an agent’s career is getting a listing; this is the mark of credibility. However the ‘chicken and egg’ conundrum kicks in – how to get a listings without having the credibility of a listing? This is where the numbers game comes back into play. You need to try a myriad of initiatives to see if somewhere, something bears fruit. As I described it the other day when sharing experiences with my fellow Bayleys newbies – it’s like growing crops, you have to sow masses of seeds and tend and nurture the ground, feed and water and eventually shoots will arise – it takes time, patience, fortitude and tenacity.

Here is a selection of the initiatives I have undertaken to date.

-       I held an local event with Bernard Hickey invited to speak about property and the economy. An excellent foundation with over 60 attendees

-       I personally door dropped over 500 flyers for Bernard’s event

-       I distribute my monthly property report to properties on the market. Sure these properties have an agent, but if the property remains unsold I want to make sure the vendors know of my presence should they decide to change agents in the future. This I see as classic reciprocity, I share the value in my report which has real contextual relevance and thereby establish my brand credentials

-       I target local streets where recent sales and listings have been active and communicate through personalised letters to all home owners with my property report and insight as to the local market dynamics. There is well know fact that properties tend to come onto the market when those around them are listed - a strange correlation that I think needs investigating!

-       I target private sellers offering my experience and advice on marketing, seeing if I can be of assistance to build trust and hopefully a future listing if they stumble in the process themselves

-       I contact owners who are undertaking renovations to discuss latest online valuations and the potential value-add of the work they are doing

This is sample of the tactics I have employed to date. To this you can add digital marketing through Google Adwords, Trade Me advertising, Facebook promoted posts. All focused to drive traffic to my personal brand website which I have tweaked regularly as I have reflected on what I can do to trigger the right engagement with my prospective target audience. I've also had produced a personal brand video so as to allow people to evaluate me as a person.

 

So what success so far?

– well as of today there is no listing with my name on it.

However there are germinating seeds which I am confident are soon to blossom. I have a client who will sell their home, however my task is to find them their next home which is challenging, but exposes me to the world of being a buyers’ agent which is a valuable experience. I also have three further clients for whom I am working to find them their next home and hopefully from that I may gain another listing or two. I am also working outside my home area when helping people as a buyers' agent which is surprising and valuable.

As I have said it is a numbers game. I should think that over this first 3 month period I have engaged and contacted over 250 people in my local area directly, plus an unknown number through other marketing. I’ve already invested over $12,000 in real cash in this new business of being a self employed agent which does not take into account the cost of my time everyday I work in this business, nor the cost of the time studying for the course and certificate.

The brutal fact is that more than half of all agents do not remain in the industry past 6 months, I am at the 3 month stage. I am sticking with it, I can see the future and I am confident that I can establish myself in this industry and deliver a professional service that is respected and valued. I’ll keep you all posted with future articles in the coming months.

and by the way...

I almost forgot this. If anyone tells you or you suspect that establishing yourself as a new real estate agent is a lifestyle choice, then tell them politely from me - if you are prepared to let that lifestyle consumes your every waking moment 7 days a week with no hope of a holiday then they clearly they are open to a new form of lifestyle.

Sure I choose to work where and when I like, but every moment you are not thinking about where the future business will come from, you will be worrying about where that future business will come from. Just some advice!


Technology could be the saviour of print media for real estate

by Alistair Helm in


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I find myself in my new role, as a licensed real estate agent in the Auckland suburb of Devonport developing a healthy pragmatism of the age-old decision as to the choice of print, or digital media when it comes to property marketing.

Ten years or so ago, I recall standing on-stage at numerous real estate conferences as the CEO of Realestate.co.nz confidently stating that at some time in the not too distant future our lives would have been so transformed by the evolution of digital media, that the humble newspaper would be dead. I foresaw a time when all forms of real estate advertising would be digital. Fast forward those 10 years and clearly that is not the case. Digital is certainly critical; valued by the real estate industry and consumers alike. However our daily newspapers still survive, somewhat depleted and sadly sullied by the race to the bottom, chasing advertising dollars for general advertising heavily driven by eye-catching headlines and lifestyle celeb stories.

However for the real estate industry print media retains a true relevance. As an agent, I value its ability to deliver passive buyers and the even more valued serendipitous buyer. The story can be easily told of buyers (unknowing it at the time) idly flicking through a weekend property supplement or Property Press at the local cafe or friend's house on a quiet afternoon, only to be enthralled by a property that they suddenly become captivated by.

The value of the print media lies in context, and the fact of strangely imprecise targeting - let me explain. The ubiquity of the newspaper places these adverts in close proximity to everyday news thereby potentially interrupting the daily read with an unexpected opportunity to present a property. It also acts as a reinforcement of a property advert to active buyers who may have seen the property online, thereby reinforcing its appeal and relevance, maximising frequency of presentation.

The imprecise targeting is a very interesting counter-logical argument. The very appeal and efficiency of the digital platform which enables for the specific search for 'this number of bedrooms' in 'this price range' in 'this suburb' is the same process that excludes a perfect property that matches all the requirements but is in another suburb that the buyer never thought about. In the case of Auckland, Wellington and Christchurch there are many suburbs that are close substitutes, yet people have fixed mindsets until they are exposed to a house they love the look of, only to find it is located in a suburb that was not on their list, but they go on to buy. That is the power of the print media. Or put another way that is an opportunity as yet not exploited by the digital media players.

So what other capability can print media offer and how might the very latest technology assist them?

Well I came across a very interesting post on Twitter over the weekend in praise of Apple's new ARKit. This is the latest software Apple has released at its recent developer conference to power Augmented Reality. Here's the tweet that peaked my interest and got me thinking about AR a little bit more - watch the embedded short video to get a sense of this capability.

So this example created the sense of an embedded sports video coming to life within a newspaper, leveraging the capability of an iPhone or iPad and the Augmented Reality software. Where you see a sports image and video on a newspaper page, imagine it being a property listing. Simply view the property page with your iPhone and the listing comes alive showing the video of the property or the slideshow for the property.

In someways this is just another iterative step that started years ago with URL weblinks on print adverts, progressed through QR codes and lately encompassed the NZ Herald Homes app that used image recognition that took the user to the listing on the web. All of these technology steps by today's standards seem clunky, especially when you see and imagine this in action (A crude representation made by me shown below roughly visualised).

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This really appeals to me. I have so often sat with people who flick through print publications for property listings and want that bit more information but end up frustrated by trying to find listing numbers and search for them on the Trade Me Property or Realestate.co.nz app.

This clearly is a golden opportunity for NZME's OneRoof - the perfect intersection of print and digital. They have the digital content and the print media platform - it'll be interesting to see how long it takes them to develop this and monetise it!

As for Realestate.co.nz and Trade Me - this presents an opportunity, but would require a partnership with a media company. The logical path being Property Press unless the appetite is big enough for Trade Me to make the ambitious move to acquire NZME, a relatively achievable acquisition when you see that NZME market cap is just $165m and Trade Me sits at $1,900m - something for Jon McDonald to think about as a parting shot of for the new Trade Me CEO.


The rise and rise and rise and rise of property portals

by Alistair Helm in


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The announcement last month of the acquisition of Zoopla the #2 property portal in the UK by Silver Lake Partners, the US private equity firm for £2,200 million (NZ$4,180 million) was a clear statement as to the confidence the financial markets and their investors have in the business models of digital real estate marketing.

Zoopla is not the leading UK digital property portal. That accolade goes to Rightmove which according to its own stats has 70% of the UK total audience for property searches. Zoopla was only launched in 2008. At that time Rightmove had been in operation for 8 years and had gone public two years earlier. Rightmove in 2008 was generating over £50m in revenue.

Zoopla though was never one to daunted and was ever ambitious, lead by the charismatic and driven CEO Alex Chesterman. Through the first 6 years, the business grew through acquisition of other real estate websites and property publications building a formidable position as the #2 player leading to the IPO in 2004.

The IPO valued the company at £990 million, half the then value of Rightmove. In a savvy move Zoopla offered real estate agent customers the opportunity to buy shares at a 20% discount; a smart move to side step a challenging move by a new industry owned start up OnTheMarket which required loyal agents to sign up to only one of the other commercial portals to try and break the duopoly. Those agents who did and hung on to their IPO shares will likely see a return of 177% in 4 years.

This stellar rise and exit for Zoopla is not an exception in the market of property portals. I thought it would be interesting to do some analysis of the key players around the world to see just how valuable these businesses have become over the years. Many of the leading portals have been in operation now for close on 20 years.

Restricting this review to the UK, Australia, USA and New Zealand is not truly reflective of the global market that sees many massively successful operators – the likes of Seloger in France, Scout 24 in Germany, Zap VivaReal in Brazil to name but a few; however I have observed and researched extensively these key businesses over the years, so feel comfortable commenting on their performance and strategy.

 

3 Leading Property Portals - NZ$30 billion in value

The top 3 portals in my opinion globally are the REA Group, operator of Realestate.com.au in Australia (and other countries), Rightmove in the UK and Zillow in the USA. Together these three businesses have a collective market value currently of over NZ$30 billion. Five years ago those same 3 portals had a market value of just NZ$11 billion. I have for reference included New Zealand’s own Trade Me for reasons that will become obvious as I proceed.

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This scale of growth is spectacular. What is even more spectacular is the relative rise in the market value of these companies measured against their own domestic market index. I have simply indexed the growth in share price to the index at June each year.

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The performance of the REA Group is stunning, eclipsing the performing the ASX market by close on 4 times over the past 6 years. Zillow doubling the Nasdaq index performance and Rightmove outpaced the FTSE 100 by more than double. Sadly though our own NZ digital portal of Trade Me with a broader portfolio than just property has not attained such stellar growth and has fallen behind the NZX index over the same period achieving just half of the market index growth over the past 6 years.

 

Australian international benchmark

The REA Group is now not just an Australia real estate digital portal it has operations in Asia and now the US. This latter move driven by its largest single shareholder News Corporation (owns 60% of REA Group) which acquired the #2 property portal in the USA (Move.com) in partnership with REA in 2014.  However in terms of profitability at EBIDTA level the performance of REA relies almost entirely on the profits of Realestate.com.au, and they keep rising year-on-year with revenue growth in the last financial year of 16% - this is a 20 year old company that added A$92m of incremental revenue last financial year to total A$671m.

REA Group though are not alone in carving out a global powerhouse performance to better all comers, they are actually part of a triumvirate of Australian digital behemoths – REA Group, Seek and CarSales – each are the global benchmark for their category of property, jobs and motors. By no small coincidence the 3 core classified platforms of our own Trade Me.

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Just like the REA Group, Seek and CarSales have significantly outpaced the ASX market index over the past 6 years, close to doubling the ASX for CarSales and higher for Seek.

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Financial Indexing of Portals

Some further financial indexing provides valuable insight into the relative performance of these global leading portals for property and other classifieds.

In terms of absolute market value the comparison is staggering. REA Group still remains the most valuable property portal keeping Zillow at bay, and a significant 50% more valuable than its jobs portal partner and 3 times the value of the auto portal.

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The inclusion of Trade Me Property is purely as a means to compare the property operation of Trade Me with its peers in other countries. I have purely used the % representation of property revenue as a surrogate for value representation. Sure I know full well that a digital business based on a 4.7 million population of NZ is never comparable with the population of Australia, UK or US; I'll come back to that benchmark shortly.

When it comes to true grunt, any financial expert will tell you that value is only a reflection of profit and this is where the appeal of digital portals comes to light. The EBIDTA margin of these portals is impressive … if you turn a blind eye to Zillow.

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Rightmove is the king of money making – for ever £1 it receives as revenue it spend just £0.27 on running the business allowing it to reinvest 73 pence. Trade Me shows its might just as effectively, with a very impressive 58% EBIDTA margin, ahead of REA and its Australian counterparts whose 31% and 45% are still worthily impressive margins.

This metric of margin is critical in comparing digital portals. The very appeal of digital businesses is scale. The simple principle being that the core cost of a digital platform should cost no more to service for a million users than for 10 million or 100 million. That is why digital businesses can generate such EBIDTA margins. However this is where things get interesting. Why is it that Rightmove serving a UK market of 66 million people can achieve 73% EBIDTA margins whereas Zillow serving a 326 million population can barely scrape 1% margin? Equally how can Trade Me serving a domestic only market of 4.7 million hope to deliver 58% margin?

The answers to these two questions are complex and not directly related. The US market is nothing like Australia, UK or NZ when it comes to property marketing, there is no such thing as paid for subscriptions for listings or vendor paid marketing; leaving Zillow to monetise agent advertising and client leads.

As for Trade Me the very impressive performance of 58% margin may possibly be part of the reason that its market value has not attained the stellar rise of its peers, as a function of stifled ambition and lacking investment courage?

The final metric I will provide is the relative performance of these portals on a per head of population basis.

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Here we see the same stellar performance of REA extracting a market value which equates to over $500 per person in Australia. Trade Me as a group delivers an impressive $406 per person in NZ,  but the truer comparative metric is the equivalent market value of the property sector (based on share of revenue) delivering a market value of just one tenth that of REA. Having said that the surprise is the relative performance of Rightmove at $130 per person in the UK. This potentially portends to the view that the upside for Rightmove is still significant, although the danger is made in assuming the UK real estate marketing landscape is similar to Australia which it is not.

The overriding clarity that these data points highlight is the enormously successful digital property portal businesses that have been developed globally over the last decade, but more significant is the powerhouse operations of digital portals across the Tasman over the same period. What can we as NZ’ers somehow learn from this and more importantly what can Trade Me learn to help it chart a more dynamic path to growth as a true NZ icon in the digital portal space?


Are we really facing a “serious shortage of properties for keen buyers”?

by Alistair Helm in


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It's funny sometimes when you look at a piece of research which on the face of it looks to be enlightening, providing as it does new facts and insight; but when dig a little deeper you discover that it merely reinforces known facts.

Such was the situation this week when Realestate.co.nz published a research study by Horizon Research of consumer expectations of buying and selling in the coming year. I was at first somewhat confused, as the report was completely buried in the monthly NZ Property Report. I was not sure that they had clearly thought through how they were presenting the data, however by tuning out the monthly stat charts the research data findings seem at first eye-opening.

The research results show that 6.4% of the adults 18 years or over surveyed are definitely looking to buy in the next 12 months, but only 2.8% of people stated they are definitely looking to sell in that same period, says realestate.co.nz spokesperson Vanessa Taylor.  

This equates to a shortage of around 3.6% of homes across the New Zealand marketplace, representing a significant number of properties currently not on the market, she says.

Even taking into account new builds which are underway and not included in these numbers, there will be an increasingly serious shortage of properties for keen buyers.
— Vanessa Taylor - Realestate.co.nz

Wow – 6.4% of adults definitely going to buy; but only 2.8% going to sell! As stated that would seem to be a “serious shortage of properties for keen buyers”

The danger as ever with statistics is that seeing one set of data in isolation can lead to misinterpretation. Sure, in this survey 6.4% of adults are going to buy vs 2.8% are going to sell. On the face of it, it certainly seems serious and due cause for alarm, especially when we are constantly being told in the media (and by politicians) that we need to build more houses to solve a housing crisis. But hold on a moment. Step back and ask what is the context of this research data. We need to ask how have results changed over the past year or the past 5 years? Are we seeing a growing trend or a declining trend? After all one data point does not tell us everything.

The beauty of the internet is that you don’t have to hound people to get them to provide the data, the data is accessible. Horizon Research has been undertaking a Housing Supply and Demand Survey since 2010 on a fairly frequent basis and here are the results.

So it would appear that the data for May whilst perceived to be high was actually down on the previous report from October last year, when the level of definite buyer activity was 9.8% and seller intention was just 2.5%. That’s 1 in 10 adults saying that they were going to definitely buy. At the same time just 1 in 40 adults said they were going to definitely sell!

How did I possibly miss that piece of news?

There is no denying that the chart very clearly shows an ever growing divergence between buyer intent and seller intent, however the question has to be asked. If as the media release this week states … will there bean “increasingly serious shortage of properties for keen buyers”?

How could this be true? Especially if we have witnessed this divergence for the past couple of years. If it were as true as the statement leads us to believe, then surely we would be seeing rampant price inflation as this pressure on supply would seem to portend?

To answer this key question we need to separate the buyer and seller data in the research.

The Buyers

First let’s deal with the data of buyer intent. The latest May research states that 6.4% of adults definitely intend to buy in the next 12 months. Let's work through the numbers. In NZ there are 2.7 million adults; being 60% of the population by age between 18 and 65.

The research states that the findings based on a sample size of 1,345 adults from a nationally representative panel show that 6.4% state that they are definitely going to buy a property in the next 12 months. The average household composition of adults in NZ is 2.02 adults per household which equates to 1.34 million properties. This reflects the 85% of private property occupied by adults under 65 years. If you apply the 6.4% proportion from the May research to this total of 1.34 million properties you arrive at the figure of 85,700 properties definitely going to be bought in the next 12 months.

A total of 85,700 properties being bought in the coming year is in fact a perfect estimate of the market. In the past 12 months volume sales as reported by the Real Estate Institute were 74,600. Sales volumes have begun rising from a low of 73,500 in the 12 months to December last year. So I would say that the research is bang on as an estimator of market demand, providing an accurate guide as to the likely pick up in sales volumes for total 2018/19.

What is also interesting in extending this calculation; is that the historical research carried out by Horizon Research shows that the past 8 years data correlates quite closely (with just a few outliers) with the market trend of moving annual total sales as highlighted in the chart below:

The Sellers

So how can the divergence of buying intention from selling intention be explained? How can it be that what we can validate that 6.4% of adults definitely intent to buy, but clearly far more than 2.8% definitely intend to sell? In fact we can I judge with confidence say that 6.4% of adults will sell in the next 12 months.

Herein lies the answer, in my opinion.

Existing homeowners go through a process. A process that ends up with the purchase of one house and the sale of another, however this process from a psychological perspective does not begin with a rational intent to sell. It starts with an intention to buy.

Selling a property is a means to an end; the end being the next home. It is a functional process, not an emotional decision process – the emotions lie in the expectation around the next home. So when asked in a survey the intention to sell, the typical adult probably under-reports, largely due to the anxiety and expectation surrounding the process of selling. That is my opinion.

So I don’t support the view that we are really facing a “serious shortage of properties for keen buyers”, we are simply seeing the normal property market at work.

This thinking is very enlightening to the processes of real estate industry in general and particularly to the marketing strategies adopted by players within the industry. I highlighted recently in my article about the likely launch of Better Homes and Gardens Real Estate how their brand positioning would not play out so well in NZ as the market here is a vendor (sellers’) market and their brand is all about emotional inspiration and lifestyle.

The fact is NZ real estate companies largely focus on the processes of selling and buying linking the brand to the "For Sale" event, but I have not seen many (if any) real estate companies, nor for that matter any real estate websites position their brand around the emotionally engaging process of discovery, in the process of finding your next home.

 

 

 

 


Does the iBuyer business model represent true innovation in real estate?

by Alistair Helm in


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Last week, a new listing came onto the market in the US – a property for sale in Chandler, Arizona. A 4 bedroom home with a price expectation of around NZ$600,000. Not that interesting you would have thought given the fact that probably close to 20,000 new homes come onto the market every day in the US.

What makes this home different from tens of thousands of others is that the owner of the property is Zillow. That is Zillow; as in the largest real estate website in the US – a property portal.

Think about that for a moment, this would be akin to Trade Me listing for sale a property owned by Trade Me having been bought by Trade Me from a Trade Me member!

Let’s be clear this is not happening in New Zealand. At least not yet, and to be honest I don’t think it is something that suits the New Zealand market. However before getting into all that, let me explain what is going on here.

A new segment of the real estate market emerged about 4 years ago in the US. The ever optimistic, cash rich and somewhat over-hyped tech sector turned its eyes, and its investment dollars to the real estate industry and asked the question – “why is it so hard to sell a property in the US, and why does it take months?”

The answer, and therein the problem, lies in a myriad of archaic systems for legal title-management and exchange; and the equally complex processes for mortgage origination. Both of these in theory being digital processes, naturally the tech investment sector said they could fix and in doing so create the opportunity for a viable business model to arbitrage residential property. This new segment of the industry that has emerged has been dubbed the iBuyer market.

The pioneer of iBuyer was OpenDoor, with the fast follower – Offerpad  and now Zillow with Instant Offers, who far from limiting themselves to just being a real estate website, sees value in this real estate service which can leverage their expertise and knowledge base around property data and valuation modelling.

The business model for iBuyer is simple. A homeowner looking to sell goes online and enters their property details, in what is a matter of hours in most cases, the company comes back with an offer to purchase the property. The offer is at around market-value based on their proprietary algorithm of an Automated Valuation Model (AVM). The seller can literally confirm acceptance and choose a completion date and the sale is then completed, and payment is made on the allotted date. There are naturally legal conditions and inspections as well as deductible fees, but pretty much this has to be the fastest and simplest way to transact real estate. So in theory, you could decide to move and within a week or so you could be moved, cashed up and onto a new life!

The process then moves into top gear with the company undertaking a fast and efficient cosmetic makeover of the property in order to get it back on the market in a matter of weeks for a price that they (and their algorithm) feel is the right market price.

The business model of these iBuyer operations is to act as the sellers’ agent, and the buyers’ agent, as well as the property developer; with the clear intention of flicking the property as fast as possible with a reasonable margin on the purchase price, this they seem to be doing.

With the full sales commission charged to the seller, as well as their representation as the owner for the on-sale, the business model allows for a satisfactory margin through the process as well as any improvement margin.

The core value proposition for this business model is speed and the associated removal of stress which has universal appeal. Just recently a survey undertaken by the Real Estate Authority here in NZ found that 35% of sellers found marketing of their property involving the open homes, the toughest part of the process. The iBuyer service removes this completely. It is critical to appreciate that the core value proposition is all around adding value; and has nothing to do with saving costs or a lower priced offer (a critique I made recently as to the only other aspiring innovations seeking to disrupt the real estate industry).

Whilst not a perfect analogy, the market for used cars is somewhat similar. If you want to trade for another car you can just sell to the dealer for cash or trade in your car, so in theory this is the process for your house – at least in the US at this time.

There are elements of the iBuyer business model that are a true disruptions of the real estate process enabled by technology:

  1. The automated valuation model has become a commodified capability, here in NZ as well as most every country of the world, empowering these companies with the core market information, historically tightly held by real estate professionals
  2. The financing of the properties that these iBuyer companies take on, is enabled by technology as they can leverage the necessary debt financing through whatever financial market structure that suits and is available at the time, packaging the portfolio of properties on-hand thereby optimising lending options
  3. Marketing directly to prospective sellers through targeted marketing and in so doing capturing the selling agent commission
  4. Utilising Internet of Things (IOT) to revolutionise the home viewing process. Once a property owned by the iBuyer company is put on the market, prospective buyers can register and access the property remotely through an app that allows unaccompanied viewings with remote security monitoring

These collectively add significantly to this technology-enabled improvement to the process of real estate, and at first sight would appear to be threatening to the traditional real estate profession. However these iBuyer companies are smart to ensure that their long term ambitions to establish a viable and significant market position are not jeopardised by off-siding the industry of agents. Their business model engages agents with a seller and buyer-side commission structure, positioning themselves to be seen as a fellow competitor in the market rather than a looming destroyer of the market process.

It is important to note that the Zillow iBuyer model is somewhat different to both OpenDoor and Offerpad in that Zillow are actually not purchasing properties in their own name, they are facilitating the market-making between willing sellers and financial investors. They are operating in much the same way as they do with their core business in market-making between buyer - agents - sellers - agents. In this way they are keen to avoid the accusation that they are competing with their customers - real estate agents, especially as they lay out the option for sellers to choose to turn down an 'Instant offer' and sell through an agent.

So having identified what these iBuyer companies provide in their business solution the next key question is – will they succeed?

I believe the answer is yes, but not in the sense of a massive disruption to the overall market. This is key, and as any investor pitch-deck will show, even a very small percentage share of the real estate transaction market in the US represents a significant business opportunity. The estimated value of this market is somewhere around US$60 billion so a mere one tenth of one percent would be US$60m turnover.

There are 2 key issues that the iBuyer business faces that I believe are going to restrict the market opportunity. Firstly there is an inherent risk related to the the volatility of the property market and the downside risk of an iBuyer company being saddled with a large inventory they cannot sell without taking a loss on sale, should the market turn down.

Then secondly there is the complete reliance on the automated valuation. The business simply cannot possibly scale if they were to rely on an army of inspectors. As a consequence their risk profile means that they will only offer the solution to what can be thought of as homogeneous houses. This is easily seen by the markets in which they currently operate – Phoenix, Las Vegas, Charlotte North Carolina, Atlanta, Nashville as well as couple of others in the case of OpenDoor. These markets have a growing suburban belt of new homes and the typical house managed through OpenDoor is recently-built homes with a price around the median sale price between $300,000 and $600,000. This is smart. These houses are a commodity that has a low risk of not finding a buyer coupled with a high confidence factor for automated valuation.

In the US this subset of the market still represents a sizeable market opportunity of around $10bn a year. For New Zealand the business model is unlikely to offer such a lucrative market opportunity. Firstly, very little of NZ housing stock falls into the category of truly homogenous - whilst there have been large scale new housing developments in Auckland that mirror the chosen US markets that have been the target of OpenDoor; and undoubtedly there will be more built in the coming years. This market segment will be small, too small for a company to achieve scale. Secondly the NZ market does not experience the same pain point that the US market suffers from, as a consequence of archaic and protracted transaction process. A NZ property can be marketed and legal transaction completed within weeks if necessary, certainly legal unconditional-sale is achievable within a month from listing day - something not achievable in the US, until now.

As to the question posed earlier, could Trade Me offer this solution? - they could, especially if they facilitated a market-making environment with verified investors. By following the Zillow playbook they could very nicely then generate a leads-business for agents of ready sellers. That would be a smart solution that might just see Trade Me advertising a property for sale that Trade Me facilitated the agent-sale of, from a Trade Me member to a Trade Me member, financed through a Trade Me member and managed by a Trade Me real estate agent.