Property price expectation weakens as property sales rise - why?

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.

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.

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.

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?

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.

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.

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.

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.

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.

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.

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.

Agents boycott of Trade Me hurting vendors

This week has seen significant media interest in the boycott of Trade Me Property by agents particularly in the Hawkes Bay and Hamilton City. Articles written have proffered opinions that "The real estate industry has a lot more to lose than Trade Me" and gone as far to look to whether the Commerce Commission will investigate the potential breach of the Commerce Act or whether the governing body of the Real Estate Agents Authority will clarify if the action of these agents is against the best interests of the vendor as the agents clients.

I shared my opinions with Bernard Hickey as in my judgement this is a matter that should not result in vendors' property listings being used as pawns in this standoff.

The fact is that there are vendors in these two regions of the country who are missing out on valuable marketing on Trade Me and as ever with the web, the data is there to back up the story.

Firstly look at listings. Generally Trade Me and Realestate.co.nz enjoy the support of all licensed real estate agents across the country (up until this time), Trade Me holds a larger stock of listings nationally as they feature private sale listings which are usually around 15% to 18% of the total of property for sale.

Looking at the Hawkes Bay data on the respective websites today based on comparable listings of residential and lifestyle property shows that there is most definitively a boycott. Compared to a similar sized area such as Tauranga the Trade Me listings are down 55% as compared to Realestate.co.nz in the Hawkes Bay whereas the listings ratio should be similar to Tauranga with around 15% to 20% more - this means that around 1,000 properties in the Hawkes Bay are not being featured on Trade Me Property. These are listings from offices of Property Brokers, Tremains, Sotheby's and others. Importantly these offices have withdrawn all the listing - recent listings as well as older listings.

These c. 1,000 listings are not attracting potential buyer interest from the more than 120,000 property buyers per day using Trade Me Property.

As a buyer accustomed to using Trade Me when searching for property there is no recognisable experience that will tell a person that there has been a boycott. The functionality of the web allows for tailored searches by location, price and type and at no point do you get a sense of the number of listings in relative terms. That is why the level of viewing of individual properties in the Hawkes Bay has not changed since the boycott began. This can be proved by this simply analysis.

Taking two properties that are advertised by Ray White (who have made no mention of their intention to join any boycott) that were both listed on the 5th February. The level of viewing on these properties comparing Realestate.co.nz and Trade Me continues to show the general trend of a 10+ fold higher viewing on Trade Me Property.

Now look at a couple of examples of the c. 1,000 listing not shown on Trade Me Property, they are not getting more viewing on Realestate.co.nz because they are not on Trade Me - here are comparable stats. It clearly shows that there is no greater viewing on Realestate.co.nz because these properties are not on Trade Me Property.

The vendors of these properties are not receiving the exposure they should. The scale of the loss is substantial - every day these c. 1,000 properties are missing potential buyers which has the potential of lessening the sale impact and competitive pressure in the market. The fact is the medium of choice when searching for property by over 90% of home buyers is the web. There are only two websites for real estate in NZ and Trade Me dominates to such an extent that not being on the site is marketing madness.

What perplexes me is that the real estate industry continue to think of online advertising as a cost, in the same way as they think of the photocopier as a cost or the phone system. They do not think this way about their preferred medium of choice - the newspaper or property magazine, that they think of as a re-charged advertising medium.

A single property advertised on Trade Me Property cost them $159 + GST. That advert works everyday to market that property until sold and would costs private seller upwards of $400. So why don't they front up to their clients and say " Our recommendation is that we market your property on Trade Me Property at a cost of $200 and Realestate.co.nz for $100 - that way your property will reach 90% of buyers" (that cost includes a small margin for admin - which they need to disclose under the REAA). If they are not confident to ask for the money upfront they could suggest adding it to the commission upon the successful sale.

This boycott is hurting the clients of these real estate agents, vendors will very soon be up in arms and potentially pulling their listings and moving across to agents who don't treat their property as a pawn in the internal squabble between Trade Me Property and the agents. These agents would be wise to reflect that to the average kiwi Trade Me is far more loved than a real estate agent!

For reference here are the links to these listings highlighted above:

Ray White Listing #1 "When location counts" on Trade Me

Ray White Listing #1 "When location counts" on Realestate.co.nz

Ray White Listing #2 "Seriously Special" on Trade Me

Ray White Listing #2 "Seriously Special" on Realestate.co.nz

Property Brokers Listing "Rural views" on Realestate.co.nz

Tremains Listing "Modern Brick Home" on Realestate.co.nz