Property statistics can be misleading

by Alistair Helm in


When the news media report that the median house price in Auckland has risen by 13% over the past year, from $562,000 last March it's now $637,000 - that’s an increase of over $6,000 per month! 

This type of property news infers that property values are rising, and rising fast; as it's getting more expensive to buy houses - that would be a good interpretation - right?

Well actually no. You cannot make that inference. To hear that the median sale price is rising does not infer values are rising by the same amount. 

Now you may consider that I am arguing semantics. However I regard the difference between the rise in property value and the rise in median sales price highly significant. A significance that too often seems to be ignored or glazed over for the sake of a good headline.

The median price is a statistic calculated from the aggregated data of all the properties sales in a month in an area - a suburb, a region or the whole country. It should not be taken as an indication of the likely trend in value of a property in that self-same area.

Each year just less than 5% of all properties are sold - that is 1 in 20, which tends to amount to less than a handful of a properties on any given street around the country. The fact is that these properties recently sold might not be representative of all of the properties on the street in general.

For example, if I were to say to you that the median price for your street had doubled in a year from $300,000 to $600,000 would you think that the property market had gone mad and you were sitting on a gold mine? - sadly not. In this purely hypothetical example the likely fact was that the 3 houses sold last year were actually all apartments in that development at the end of the street and all the sales this year were of 4 bedroom properties along the street - you get to see the problem with the data?

This is in my opinion, part of the problem we have witnessed over the past few years in the inner city suburbs of Auckland. Suburbs that in some cases have seen rises of over 70% in 5 years. In these suburbs the properties being sold are in the main traditional 3 or 4 bedroom homes on 400 to 600m2 sections. So can we say here that values have risen by 70% in these suburbs as the median price indicates?

The truth is that rather as in the previous example, were the comparison was between houses and apartment, in these suburbs the comparison is more likely to be between un-renovated properties and renovated properties.

Look down any street in the inner city suburbs of Auckland and you will see the impact of gentrification and many hundred’s of thousands of dollars of renovation costs.

Here is a simplified summary of what has been going on. In 2009 and 2010 smart, savvy buyers (investors, developers and capable homeowners) started buying up ex-rental properties in these suburbs for prices around the $700,000 to $900,000 range thereby establishing the then median price for the majority of sales in these suburbs. Gradually over the past 4 years these properties have been renovated and placed back on the market following renovation projects costing anywhere between $200,000 and $600,000. The properties then have been selling for between $1,250,00 and $1,600,000 making a healthy return for those players in the market and in the end impacting the median sales price driving it up from the $800,000 range to $1,400,00 range a 70% rise. 

These renovated properties whilst in the main are still 3 or 4 bedroom properties on 400 to 600ms sections, however they are in many respects new homes as effectively all that remains of the original property is the floors, walls and roof. These improvements have fundamentally changed the inherent value of the property - as you would expect when a renovation costs averaging $400,000. But it is wrong, and does not follow that all properties in these streets / suburbs are now valued in the range of $1,400,000.

Here's a snapshot of inner city renovations of the past few years - then and now:

Further proof (if needed) of this situation, you need not look further than a couple of recent profile articles from the NZ Herald highlighting renovations in the inner city suburbs of Auckland


Grey Lynn - purchased Oct 2010 $604,000

Renovaton - new bathroom, new kitchen, redecoration

Sold 2014 $835,000




Ponsonby - purchased 2002 $620,000 

Current rating valuation (based on QV computer generated valuation model) 2011 $980,000

Extensive renovation

Auction 25 May - price expectation around $2,000,000

 


Now there is no doubt that these properties were rightly valued as a result of the selling price on the day. That was the price the winning buyer was prepared to pay for them, however does it mean that all of the other 80+% of properties in these suburbs have also risen in value by 70% ? - clearly not.

However as the saying goes and as all real estate agents are keen to observe - ‘A rising tide lifts all boats’. The problem illustrated here is that the statistic of median price is being misinterpreted as valuation.

The other compounding factor is that the source of property data on valuations, QV actually rely on sales price data to establish valuations. There computer based algorithm utilises recent sales data of similar properties (judged by size, not standard of refurbishment) to establish a current valuation. This valuation is then the benchmark by which they judge the sale price and that variance drives there monthly property vales trend analysis.

It is only a registered valuer undertaking a full assessment of a property through an on-site visit and evaluation that can accurately assess the true market value of a property.

 

Is there a better way? That is the question

Clearly a property sold after significant renovation or alteration cannot be judged to be representative of all properties in an area, whilst a property carefully maintained and resold after 3 years would be representative. Maybe this is the question that needs to be added to a more comprehensive data set collected by the Real Estate Institute. Through their comprehensive process of recording all sales by licensed real estate agents they can then provide a more accurate and representative price indicator so we avoid the inference that median sales prices are judged to be the same as property values, and in so doing improve the reporting of true values.

 

    

 


Changes in house insurance - will it change our view of property CV's?

by Alistair Helm in ,


House prices.jpg

We still seem to believe that the CV or Capital Value of the property is the benchmark by which we should judge property prices. Such was the focus on the Campbell Live article this week when judging the rights and wrongs of the Transport Agency for selling houses at what some consider unacceptably high prices “as compared to their CV”. Houses which they had purchased to facilitate the process in the construction of the new Western motorway connection in Auckland. My views on this specific matter were perfectly aligned to those expressed and articulated on the blog post by Open2View – enough said.

It does though demonstrate a continued practice by the media fixating on the sale price as compared to CV. Well I sense a coming ‘rude-awakening’ for a lot of people when instead of relying on the computer algorithm of QV to establish a benchmark of ratable value as a notional 'valuation' we instead may well turn to a more logical measure – the cost of rebuilding an existing house.

Now I know that just as a brand new Toyota Corolla costs around $35,000 whereas a 5 year old one costs around $12,000. A new house costs more than an older house due to the current cost of materials and labour being the determinant of the cost of a new house, whereas a ‘second-hand’ house costs what a willing buyer is prepared and a willing seller readily accepts.

But given the changes to the way the insurance industry views property insurance in the post-Christchurch earthquake world, we all will need to look at our property measured against the cost of replacement.

The industry has been undertaking an advertising campaign to highlight just this matter and gain an appreciation by homeowners as to the cost of replacement of a house. Because you cannot simply ignore this issue as it will effect every person that owns a house and has property insurance.

Whereas in the past your insurance cover could be purchased as a replacement cost with no defining financial number – now all such policies need to stipulate the cost of full replacement. That full replacement also has to cover the costs of demolition and clearing the site ready for rebuilding. Your insurance premiums will be assessed on that replacement cost and should the worst event occur of a fire or other disaster the insurance company will only pay out to the maximum of the defined cost of replacement, which if you have under estimated will leave you to foot the bill for the balance to get your house rebuilt.

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Just to demonstrate just how this change will impact insurance and homeowners' appreciation of the value of their home, let me take you through an example of a property which I visited at an open home recently.

The home In the highly popular suburb of Grey Lynn has a Capital Value of $870,000 which is made up of a land value of $590,000 and improvements of $280,000. These improvements are defined as the building and all that exists on the bear land.

I went through the Home Rebuilding Cost Calculator to estimate the total cost of replacing this property. A highly detailed and lengthy exercise which does require a fair degree of appreciation of the details of your home’s construction.

The calculator came back with an estimate of $400,487 which includes GST and also an allowance for professional fees, demolition and removal of debris from the site.

 

Interesting that the CV for this property assessed the land at a value of $590,000 and the building at $280,000 yet the replacement cost of the building is estimated at $400,487. If the value of the land is appropriate (which is more likely to be the case) at $590,000 then the total 'value' of the land and building is very close to $1 million.

You are I am sure, interested to know the market value of the property today based on that well established notion of a "willing buyer and a willing seller". Well the property was sold recently for $1,395,000. This would therefore tells us that the value of land in this area is actually appreciated by 68% since the last assessment was undertaken in 2010/2011 – Auckland, or at least this area of Auckland is experiencing unprecedented demand.

Note:

I was prompted to write this article by the comment sent to me by a retired Quantity Surveyor who had read my article on why we should get rid of CV’s, he rightly asked the question as to whether people had considered what the long term effect will be on property / sales valuations once the insurance industry changes over to declared values for house insurance policies. He stated that as he had his own construction business engaging in construction of architecturally designed houses & spec housing. Many of the houses that he built had construction costs of more than double what the current CV values were & he rightly wondered once owners start realising that replacement costs far exceed the CV's for there property, that they will start to try & negotiate selling prices based on replacement costs.

He reflected that this might well apply more to expensive architecturally designed properties, but in his experience all building costs usually exceeds CV values due too as most property valuations are based on historical values & consequently out of date.

I am grateful for being prompted by this question and would gladly welcome any other such questions for future articles.