How can the median price be rising when property sale prices aren't rising?

by Alistair Helm in ,


This is not a conundrum, it is in my opinion the reality of the situation in today’s market and has lead to these fairly striking statement by some leading economists:

Westpac's Chief Economist Dominick Stephens said “It is impossible to tell what is really going on with house prices

New Zealand Institute of Economic Research (NZIER) principal economist Shamubeel Eaqub said “trying to forecast house prices has been a mug's game

The reason behind these statements is the conflicting data coming out from REINZ and from QV - specifically the March median price data which showed an accelerating rise in price from 8.2% year-on-year growth in February to 9.2% in March set against a fall in sales of 10% and QV reporting that the rate of price increase was easing. In a single month REINZ reported the median price of NZ property had risen from $415,000 to $440,000!

There has even been questions as to the accuracy of the REINZ data. This is not something I believe, or have any insight into, but such comments certainly demonstrate the concern in the market as so much value is attached to the timely and accurate indicators of the property market by so many sectors of the economy.

I have long advocated the use of the REINZ Stratified Median price index as a more accurate methodology for tracking the true indicator of the price of property sales across the country, however even this measure, long trusted for its lack of volatility has of late shown some wild fluctuations. 

Tracking these fluctuations over the past 20 years as the chart below highlights shows that on a 3 month moving average basis the recent decade has shown a normal fluctuation range of around $3,900 from month to month, this was a higher level of volatility when compared to the 90’s when the volatility was less than $1,700 month to month.

In the last 3 months this volatility has spiked with the 3 months average for the 2014 year so far showing a volatility month-to-month exceeding $11,000 - a highly volatile situation.

 

So why is it that we are seeing this volatility?

In my opinion the impact of the LVR restrictions are having a greater impact on the property market than is currently being acknowledged.

Let's look at the facts:

  • Sales of lower priced properties are down - the data is reported by both REINZ and in the Auckland market by Barfoot & Thompson. 
  • Overall property sales have already come off their peak and are easing - 10% down in the year to March.
  • The retail banks have demonstrated an ‘over-correction’ to the Reserve Bank imposed 10% criteria for high LVR lending, resulting in upwards of a 90% fall in the approval of 80+% LVR mortgages.

To better assist in understanding how these indicators might be contributing to the volatility in the median price I have developed a hypothetical scenario of the composition of the property market sales in a month. The by comparing this with a subsequent month where the underlying property prices remain the same year-on-year across all price sectors, where sales volumes remain unchanged across all price sectors, with the exception of the lower priced end of the market and let me show the impact.

Here is a hypothetical normal distribution of property sales in say March 2013 - 5,082 sales with a median price of $400,000 and for reference an average price of $507,000

Now let’s jump forward to March 2014 - let's reduce by 23% the sales volumes in the price ranges $225,000 to $400,000 - just these price ranges. All other sales volumes by price range remain identical to the year earlier.

The outcome of this impact (the hypothetical impact of the LVR restriction) is shown in the chart by the marginal sales reduction in red across those price ranges.

That 23% fall in sales across those lower priced properties segment leads to an overall 10% fall in total sales to 4,567. The median price though went up by 8% to $431,000 and the average price went up by just 4% to $528,000.

This model is designed to demonstrate that what we could be experiencing is two components of the property market working in complete isolation.

The majority of the property market is plodding on unaffected with the no change in year-on-year sales volumes, and not experiencing any price appreciation. Whilst in those sectors directly affected by the LVR restriction the sales volumes have dropped by 23% but equally with no price change amongst those sales. The net effect though is that the signal being sent out to the market through the median sales price is that property prices overall are rising in an inflationary manner.

A classic situation where aggregated statistics belies the true situation.  


Auckland house prices continue their relentless rise

by Alistair Helm in


In the space of just 5 years the Auckland property market has risen by 52%. Back in November 2008 the Stratified median price in Auckland as measured by the Real Estate Institute was $435,700. The November sales data for 2013 shows that median price is now $664,100. Five years, a total increase of $228,400, that's more than the average annual earnings in Auckland over that period!

 

Auckland Stratified Nov 13.png

As ever peaks and troughs in property markets are only ever able to be judged in hindsight, but buying a property in November 2008 now seems like a smart move, although at the time there would be many calling it a risky move given the trend of declining prices at the time.

Future Trends

The question often asked in relation to the prediction of property prices is how best to judge future prices based on past trends. This is, as often stated, not an exact science. However with over 30 years of data from the Real Estate Institute it is certainly worth exploring.

For comparisons to be made from one time period to the next requires a degree of normalising; which when it comes to prices, whether that be for property or households goods means adjusting for the impact of inflation. The general rise in prices as a function of inflation is far different from specific price rises caused by pressure of supply or demand, as is often the case with property.

Using the Reserve Bank Inflation Calculator and applying it to the monthly data of Auckland Stratified Property Prices produces this chart below which shows a somewhat different picture as to price movement for the past 6 years.

Auckland CPI adjusted recent years.png

 

The rise of 52% in today's dollars equates to a 37.8% increase when adjusted for inflation - still a significant rise over 5 years, however as can be seen almost all of that rise occurred in the past 2 years, as before that property prices adjusted for inflation hardly rose at all.

This steep rise of the past 2 years is pretty significant. From the starting point of October 2011 - 26 months ago the CPI adjusted Auckland median house price has risen by over 29%!

I thought it would be interesting to compare this rate of increase with the last time we experienced a very active period of house price growth back in 2002. That point was the start of what became a relentless rise which over a 5 year period saw property prices rise close to 70% in real terms, only ending with the start of the Global Financial Crisis.

 

Auckland CPI adjusted since 92.png

Taking just the comparable 26 month periods which commenced these periods of steep growth the period of December 2001 to Jan 2004 was a 27.2% rise. So by this measure we are current witnessing a faster rate of property price appreciation than the period cited by many as a period of rampant property inflation that we would never see the likes of again!

The question then has to be asked as to the likelihood of the property price appreciation continuing for another 3 years from now based on the parallel of the past 26 months of the 2001 run in property prices?

As ever that is a very hard call to make. The factors driving the rise in 2003/4 were very strong global economic activity backed by a strategy of targeted low interest rates as the US Federal Reserve sought to ensure the US economy staved off the recession and impacts of 9/11. Technology was driving prices lower and the powerhouse growth of China and the rest of  BRIC countries.

That was 2003/4, as to 2012/13 the world is emerging, still slowly from the GFC, the US economy and the British economy are picking up steam and the forecast for the NZ economy is for very strong growth, some say growth not seen since the 1970's. Add to this the migration expectations as they are likely to be felt more strongly in Auckland and then overlay the ever present issues about new construction of residential property and you have the seeds of strong factors for continuing property demand. Finally the cost of finance is targeted to rise, certainly a dampener on property prices, but when and by how much is debatable. In relative terms a 1% or 2% increase in mortgage rates will be significant when the current rate of 6%, but finance for property at 7.5% or 8% is in the long term still considered manageable.

In the short term the trend of property prices will likely be a slowing of growth. That is to say that when property prices take off as they have over the past 2 years the rate of growth has to slow as rises of 15% or put to 20% are unsustainable -  a 10% or below rate of annual growth is more likely - still seeing prices rise.

The chart below tracks the first 36 months of the property rises from December 2001 as measured as year on year growth and then tracks the 26 months of the 2011 to date run. An similarity of price growth trend - but very likely to tail off in the next 12 months. 

 

Auckland monthly growth comparison Nov 13.png