New builds and property sales follow a very close correlation

by Alistair Helm in


Recent data shows that new construction consents are growing at the fastest rate since 2002, with the seasonally adjusted "work put in place" up by 15% for the first 3 months of this year. This level is welcome news to the politicians who I suspect have been endeavouring to fast-track new consents and in so doing alleviate the shortage of housing we constantly hear about especially as Auckland's populations expands and Christchurch gets down to the rebuild.

For me the issue I was most interested in with this latest data is as to whether there is any correlation between the level of new builds and the level of property sales and if so what impact one can have on the other.

Diving into the data shows that based on the statistics of the past 12 years, it would seem to indicate as seen from the chart below that the trends of property sales and new construction consents track fairly closely.

The data would seem to suggest that there is a lag between consents and property sales. This turns out to be 6 months; which when aligning the consent numbers with property sales - 6 months in arrears shows an almost perfect correlation.

So having established that there is a correlation, and quite a close correlation at that (accepting that the past 6 months appears to be bucking this trend - more of that shortly) the question is why is that the case?

I can only make a supposition as to this correlation, but my hunch is that it all comes down to confidence. The property market in respect of volumes sales is a visible demonstration of economic confidence, at least in respect of the domestic residential economy. A rising level of sales creates the capacity for people to examine and progress on new construction whether that be custom construction projects (which typifies NZ home building) or group home builders. Increasing sales create liquidity in the property market are fuelled largely by easier capacity for finance and these combine to progress construction projects to the consent stage for design concepts that have been sitting awaiting a financial trigger.

Naturally with such a correlation the converse is also true and is shown through the data that a falling property sales market has a dampening effect on consenting of projects. 

The first quarter of this year as highlighted earlier is though very interesting, as we are for the first time witnessing a divergence of these two trend lines. Given the normal 6 months lag we should by now be witnessing the consent levels begin to tail off as property sales plateaued some 9 months ago. 

The clear assumption is that the construction rebuild of Christchurch and the extra focus on building on Auckland is driving this divergence. This may well be viewed as the successful adoption and implementation of policies at local and national government level.


What can we glean from the April property market data?

by Alistair Helm in ,


The most noticeable component of the monthly summary from the Real Estate Institute for April was how conspicuously it lacked any great hyperbole. The facts were clear - sales volumes continue to fall and the fall was significant in the month, down 22% from March and down 20% year-on-year.

The fact is that sales volumes have been trending down since they peaked in October last year, reaching 80,677 on a moving annual basis. Since then they have fallen 4% to a moving annual total of 77,151 including April.

The April total of 5,670 sales was as the Institute stated the 7th lowest April since the data commenced over 23 years ago. I would go as far as to say that there were extenuating circumstances that partly accounted for the fall in sales. The Institute did reference the coinciding of school holidays and Easter and its effect on working days. I would judge that the key coincidence was the fact that the Easter week ended with Anzac day thereby creating two sequential long weekends and a very short 3 day business week which was a chance for people to escape in the last rays of summer as they did.

The last time this occurred was in 2003 when the impact on sales was equally significant - April 2003 saw a 1% fall year-on-year coming off a sequence of strong months in January / February / March of that year respectively +21% / +11% / +11%. By comparison 2014 saw January year-on-year sales down 4%, February down 8% and March down 10% before the April fall of 20%. Out of interest May 2003 saw a rebound with sales up 25% year-on-year. It could be that we may well see a rebound in May this year.

The fact is real estate agents are in many ways more influential in the marketing of property these days than a decade ago. Action was noticeably focused to getting listings onto the market in early March coupled with the avoidance of auctions and other time-bound campaigns ending around the Easter period. This did in some way help to deliver what was actually quite a strong March. 

In terms of price data the median price fell in April from a record high set in March of $440,000 to $432,250. The more reliable Stratified price edged a small increment higher from it's peak in March of $447,003 to $447,646.

As has been discussed recently there have been questions asked as to the true indication of property prices as represented by these two measures given the artificial inflation of median price as a consequence of the significant decline in sales of low value property. On a year-on-year basis the sub $400,000 price bracket saw sales decline by 32% - far in excess of the 20% decline in total sales in the month.

This factor is clearly impacting the true measure of property prices for just as the composition of sales is changing away from sub $400,000 properties, so it is skewing towards the $1m+ properties which grew by 14% year-on-year thereby exerting a larger influence on the median.

Gradually the impact of the this slow sales of lower price property will be reduced and the median price measure (either in raw form or stratified) will begin to reflect the true selling price of a representative selection of property sales. At that time and I believe the April figures are for the first time beginning to reflect this, we will likely see some easing in property prices, clearly showing that the market peaked in price and sales volumes back at the end of 2013. 


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 Realestate.co.nz 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.


Property sales - the end of the golden summer?

by Alistair Helm in


Courtesy Flickr - James Watkins

Courtesy Flickr - James Watkins

Residential property sales for 2013 totalled 80,119 as reported by the Real Estate Institute. This total is down by a third from the peak of sales in 2004 when 120,000 a year was a more typical level as highlighted in the chart below which tracks sales over this last 10 years as measured on a 12 month moving annual total. The 80,000 level whilst clearly no where near a return to those heady days, is though up 50% from the lowest point of the market in early 2009.

NZ sales to Dec 13.png

 

Sales have been in a steady and sustained recovery for a period of 30 months, the longest sustained growth period of the past 10 years, however that period of growth appears to be coming to an end as total sales appear to be plateauing at around 80,000. The past 2 months have seen the rate of growth turn negative as that plateau - real or imagined is reached.

Growth rate in property sales.png

 

Where to from here is the key question and why is it, that the level of sales has not returned to the pre-GFC levels of 100,000+?

The latter question is easier answered than the former. The banks and lending institutions are approaching residential property with a tighter control than they did in the mid 2000's, added to which property owners and prospective owners have come through the very real experience of property price falls, a phenomena that until recently was judged to be something that happened in other countries and to other people. A final consideration is that a significant portion of the sales in those early years of the first decade of the 21st century were a function of private investors keen to buy any property for rent based on the simple premise of banking the 'guaranteed' capital gain and writing off the 'paper loss' against tax. That approach to property investing especially by naive amateurs has been shown to be far riskier than was thought at that time.

So what of the future? - are we really at the end of the golden summer in terms of sales volumes? - has the Reserve Bank and its rules around LVR's finally had the desired effect of constraining the market? 

To better understand this requires a closer examination of the state of the market matching supply and demand across the country and in the major cities. The level of inventory as an indicator of available properties for sale as reported in the monthly Property Dashboard based on the Realestate.co.nz NZ Property Report is a good guide however seeing the trend over a 2 year period provides a clearer picture.

For this reason I have tracked the respective trends in sales volumes on a quarterly basis, year-on-year against the number of new listings over the past 2 years. The red bars reflect the trend in property sales, with the grey bars the trend in new listings.

NZ sales & listings.png

 

The picture for the whole of NZ shows the tailing off of property sales. A year ago sales were up 27% against the prior quarter of 2011 with listings up 4% - in the last quarter of 2103 sales were down 6% whilst listings were up 2% - this would indicate as the intermediary quarters show, the market is lessening its tight grip as a sellers' market and entering a more balanced period - a period that should allow buyers to breath a bit more easily and require sellers to be more pragmatic to buyer demand which in the past couple of years they have taken for granted.

Looking at Auckland specifically, the picture is somewhat similar to the national picture with this tailing off of sales whilst listings are shown to be growing albeit slowly thereby potentially allowing this heated market to cool significantly.

Akl sales & listings.png

The Wellington market equally is experiencing a tailing off of sales volumes, however what is most conspicuous is the consistent decline in new listings through the past year. For the past 4 quarters new listings have tracked below the level of the prior year and that decline accelerated in the final quarter to a 6% decline indicating that the market activity is declining and the market availability of new listings equally in decline.

Wellington sales & listings.png

The Canterbury market is the one major city / region that is not mirroring the national trend. The market here is as anticipated, continuing to see a recovery with growth in listings and sales albeit at modest levels.

Chc sales & listings.png

 

This article and analysis is focused on property sales, the number of transactions. It is not about property prices, however they are inextricably linked and tend to follow the same trends with volumes leading prices, if as we are seeing a lessening of demand through a plateauing of transacted sales then that is likely that we will witness a lessening of pricing pressure which should have the effect of cooling the market, not necessarily leading to price falls but at least taking the steam out of the market.


Have property sales returned to normal levels yet?

by Alistair Helm in


"Property sales up 21% on prior year to the highest level since 2007" read the press release from REINZ summing up the past calendar year.

Certainly the property market has seen a recovery which started last year rising 9% from the low of 56,000 in 2010, and then this past year rising a further 21% to the total of 74,000 property sales.


Property sales 92 to 2012.jpg

However as the chart above shows that sales last year were 10% below the average of the past two decades.

Ranked for those past 21 years from the lowest sales year (2008) to the highest (2003) shows in fact that the total sales for 2012 was identical to the year 1993 - can anyone remember that far back in terms of real estate ??

Property sales in ascending order 1992 to 2012.jpg

That situation where sales last year totaled the same as nearly 20 years ago brings to mind the analysis of relative sales to the number of dwellings in this country.

In 1993 according to data from Stats NZ there were 1.214 million dwellings and therefore the sales in that year of 73,959 represented 6.1% of all dwellings being transacted just above the 21 year long term average of 5.9%. At this time there are estimated to be (we are awaiting the next census) 1.558 million dwellings, so the total sales of 74,000 in 2012 represents just 4.8% of all properties being transacted in that year. Clearly we are yet to return to what might be called normal levels.

percentage of property sales.png

The property market in October certainly shows growing confidence (in Auckland at least)

by Alistair Helm in


Transient

The property market in October certainly shows growing confidence (in Auckland at least)

The Real Estate Institute released the October statistics to the headline of the "market roars into life" - well certainly it was a very active month with sales up 33% on the same month last year and property prices setting new records.

I think it is useful to see the property market as an industry employing as it does over 10,000 active sale agents and transacting over 72,000 properties in the past 12 months. The value of these annual level of transactions has grown in the space of 12 months by $7 billion; growing from $25.6bn in the 12 months to October 2011 to $32.6bn in the past 12 months.

For me the question remains - is this an Auckland phenomenon or is the "market roaring into life" across other parts of the country?

Just last month prompted by this question I examined the make up of the property market and the representation of Auckland within it and came up with the conclusion that the activity in the NZ property market is largely the Auckland factor. Applying the latest data for October to the same set of historical sales data confirms this continuing trend. 

In October Auckland represented 39.4% of all sales nationally, up from 39.2% in September and up from 36% a year ago. The chart below shows this trend with the red line representing the moving annual total percentage which is growing very strongly through 37% of all sales.

When viewed as sales tracking on a 12 month moving average basis the divergence between Auckland and the rest of NZ is very clear with the gap continuing to widen, although there was some pick up from outside of Auckland. 

As to the other major regions of Wellington and Canterbury, their respective performance is viewed in these charts below.

Wellington is showing some signs of growth, nothing of the order of Auckland and certainly fairly flat over the past 2 years.

Canterbury whilst showing some strong growth through 2011 has seen a plateauing in for the majority of 2012.