In a heated property market do sellers’ price expectations become inflated?

by Alistair Helm in

It is a commonly held view that people looking to sell their home and agents that act on their behalf, have a sale price expectation way ahead of the reality of what buyers will actually pay. It is logical. Why would a seller not pitch a price at least a bit above what they would expect to get. Additionally in a heated market one would expect these expectations on the part of sellers to become further inflated to the point of outright greed - Right?

Well it seems that in general across NZ, sellers seem to be demonstrating restraint and setting a price expectation that is actually moving close to the selling price - or seen from the other perspective buyers appear to be paying closer attention to the price expectations of sellers!

Is sanity creeping into the property market?

Here are the facts based on the last 7 years - a period that started as the property bubble peaked in 2007 and has taken us through a property crash and a property resurgence.

Over the past 7 years the median asking price as analysed by all new listing added to has risen from $400,000 in January 2007 to $495,000 in March 2014; whilst the median sales price as reported by REINZ has risen from $327,000 to $440,000 last month.

As would be expected the asking price has remained ahead of the selling price, but that margin has actually decreased over the past 7 years from a premium of around 205 to 25% to nowadays around 15%.

UPDATE: I have at the request of a commenter added this modified chart of the variance of asking price to sales price using 12 month moving average data thereby removing any seasonality.

This trend is very clearly seen when the data of asking price and selling price is tracked on an index basis where the January 2007 data is set at 100. Here the rise in the median sales price can be seen growing faster than asking price over the past 7 years.

Asking price in the last 7 years has risen by 23% as comparing March 2014 with January 2007 whereas sales prices have risen by 35%.


Possible Explanations

So why would it be that asking prices has not kept pace with selling prices? - here are couple of explanations that I would put forward:

It's a sellers' market and buyers have to be price-takers if they want a property

The most recent 3 year period at least has seen a very strong sellers' market where inventory levels have been historically low coupled with low finance costs and ready access to lending, this has created the most recent property inflation spike which has set the media alight with expectations of a bubble. Such media coverage tends to invoke the 'herd mentality' which creates an environment where buyers loose negotiation leverage as the power switched to sellers - buyers then have to accept that they need to pay to secure a property they want or fear loosing it.

Agents are taking more care in appraising properties as a consequence of new legislation

The most recent changes to the Real Estate Agents Act came into force in 2009 and one of the requirements of the Act was to require all agents when undertaking an appraisal and before a signed License Agreement is completed, to provide the vendor with a written appraisal document which must include an indication of expected appraisal price for the property. This price is then often used as the listing price for website search range - the 'hidden' price which drives the search engine of the website without a specific price being published. This requirement of the Act is likely to have driven a behaviour amongst agents to be more accurate (and thereby less inflated) in estimating a sale price.

Agents are becoming more conscious of the role of the web and pitching prices to suits searching

In someways as a follow on from the last explanation, the last 7 years has certainly seen a significant change within the real estate industry in the appreciation of the role of the web in property searching and discovery. As this transformation has occurred agents have come to realise the importance of the price ranges and this may well have lead to asking prices entered as search prices being set to optimise the exposure of a property when people are searching. Whilst this alone may not have caused this narrowing of the gap between asking price and sales price, in the early period of the last 7 years the likelihood was that most agents delegated the task to office admins who may have been given a range of price search and taken upon themselves to enter the range of a specific figure.

Reliance on industry automated appraisal systems for that are powered by less timely sales data 

Most agents use one of the automated appraisal tools offered by Terralink with Property Guru or Property IQ offered by Core Logic - both of these are themselves powered by the database of settled sales from the LINZ database. This database is on average at least 3 months older in terms of data than the REINZ sales data which could cause a lag effect therefore depressing the potential price inflation factor evident in the market.

In my view it is likely that all of the above could be contributing to some degree to this trend of a convergence of asking price and selling price. I certainly don't expect them to converge however they are both key indicators of the property market with the measure of asking price being correlated to property sales as I analysed a couple of months ago in relation to the Auckland market.

Property price expectation weakens as property sales rise - why?

by Alistair Helm in ,

At times I have to confess I get a bit lost in analytics and data analysis, trawling through the reams of property data available - I love to seek out trends and then try and interpret the correlation. I have come across just such an interesting correlation and am curious to postulate some rationale behind the correlation and see what others think.

The correlation is that there is an inverse relationship between property sales volumes and the alignment of the asking price of property to the eventual sales price. That is to say that as sales volumes rise then the differential between asking price and selling price lessens, whereas when sales volumes fall the gap widens. Or put another way, sellers seem have a more realistic price expectation in a rising market! - not what I might have thought.

I was prompted to this correlation when examining the current trend of asking price to sales prices over the past 5 years. The source data I have looked at is the Stratified Price Index from the Real Estate Institute and the Asking price from the NZ Property Report which uses a 80% Truncated mean price. I have chosen to examine the Auckland market specifically as it has witnessed sizeable movements in both volume sales and prices over the past 5 years.

Auckland property sale prices and asking prices.png

In the past year the asking price for Auckland properties coming onto the market has actually fallen below the sales price, or put another way the pace of sales prices has outstripped asking price. This was the beginning of the data trend analysis. I next added the data of property sales over the period and tracked this against the variance of sales price to asking price.

Auckland sales to sales price to asking price variance.png

The red line represents sales tracked on the left hand axis whilst the grey line tracked on the right hand axis shows the percentage variance of sales price to asking price with the parity level marked at the 0% horizontal line. A very clear correlation is seen albeit the monthly fluctuations make the chart a trifle messy.

Applying a 12 month moving average to the data sets though provides a clearer picture of the correlation.

Auckland MAT sales to asking price sales price analysis.png

So having established this correlation, the question is how can this best be explained? Here are some thoughts:

1. Property sales are a lead indicator of price movements and as can be seen there is a lag in the trend correlation of anywhere from 3 to 9 months. If asking prices are set based on current market demand and sales prices follow by a lag then the gap between asking price and sales price will narrow as sales consistently grow.

2. Asking prices are set more by agents than by vendors, as sales pick up agents are motivated to sell and therefore set more realistic expectations of asking prices especially at the early stage of sales growth. On the downside as sales fall agents hold out for a more optimistic selling price than the market would indicate.

3. In Auckland as we are so often told a majority of property is marketed without a published price and often for sale by auction. The asking price is created by the website search price which is not public. Therefore it could follow that as auctions become more popular (as sales growth takes off) the search price is set at the bottom end of price range expectation to attract attention which leads to this narrowing in the gap. Conversely the fall in sales drives less auctions and more realistic search range pricing.

4. The widening of the gap between asking price and selling price is possibly explained by the fact that expected asking prices still reflect an optimism by agents to see price continue to rise when the reversal of sales growth actually seeing property prices fall.

Whatever the explanation I think it is interesting to see just how close asking prices have come to the selling prices - the property sales have though started to tail off and therefore the acid test will be if the gap between asking price and sales price widens driven by continuing growth in asking price expectation.