What is really happening in the property market?

The property market is currently presenting investors with good buying opportunities while home sellers lose out. But is this how our property markets should be performing? Or is this a reaction resulting from misleading information that has confused the public, causing sellers to place their properties on the market at a discounted rate unnecessarily?
 
Residex CEO, John Edwards believes it’s the latter.

“Misinformation, incorrect reporting or misunderstandings of what has been said has potentially caused a situation where for those of us who have bought in the market over the last month will probably make windfall profits while those who are selling will have not made the profits they should have; in fact some sellers will have lost money unnecessarily.”

There has been widespread press lately that Australia wide housing values fell by 2.1 per cent in the March quarter. However, the party who led this view was making this statement because it was convinced that housing growth performance should be reported on seasonally adjusted terms.  

According to Residex, who have been reporting on the property market for more than 21 years and has the most extensive database in the industry, the correction was five times less than this figure, and believes seasonally adjusting figures creates misconceptions of the market and has detrimental effects.

“We are not measuring a commodity like wheat or wool production, or for that matter housing approvals or lending activity. We are measuring a fixed asset value and it is important not to confuse people and only present what has actually happened”, said Mr. Edwards.

Residex are not alone in this opinion. Michael Sherris, Professor of Actuarial Studies at the Australian School of Business supports Residex’s view.

“It is clear that there is seasonality in some housing markets but notwithstanding that, it is not reasonable to adjust growth numbers by a seasonal factor if the actual level and performance of the market is what is being measured.”

Average day, ordinary Australian doesn’t understand statistics as analysts do. Reporting seasonally adjusted figures such as previously mentioned, rather than reporting what has actually happened within a market, may cause people to sell their most valuable asset, their home, under misconceived views that housing values are seriously correcting. As a consequence, these people are probably accepting an offer on their home that is lower than its true value.

“As a long term analyst, I know that the housing markets are important to each of us individually and to a very large number of businesses. Incorrect information will have cost us all as our confidence was turned down and businesses failed to transact deals that would otherwise have been completed because the market reacted to an overly pessimistic view of what was happening”, said Mr. Edwards.

Let’s break down exactly what has happened to get the bigger picture.

A well-known Australian research company within the industry reported that home values across Australia softened by -2.1 per cent (seasonally adjusted) over the March quarter (-0.4 per cent in raw terms).

Residex reported house values fell by 0.55 per cent for the quarter, while units in fact increased in value by 0.65 per cent. Therefore, the raw number of the above statement, -0.4 per cent, was the ‘real’ result of what happened in the market, or close to it.

Over the long term, the usual growth rate of property in the March quarter is 1.7 per cent (as calculated by the other party). Therefore, during the March quarter just past, house values didn’t perform as well as they typically do, which is producing a growth rate of the 1.7 per cent. Values fell by 0.4 per cent, meaning they performed 2.1 per cent worse than they typically do on average in a March quarter – so no great fall, just worse than what is typically.

Generally, seasonality is a measure of events, not physical assets. Mr. Edwards said if anything is to be seasonally adjusted regarding our housing markets then it is sales activity, which is what Residex constantly does in statistics it releases.

So, what really happened in our housing market for the March quarter?

Residex databases date back up to 35 years plus for capital cities across Australia and using that data, along with proven robust index technology, an assessment of the market has been made for seasonality and presented in Table 1.

The median growth rate quarter by quarter is displayed, together with a measure of the existence of seasonality. The potential for seasonality is measured by presenting a number between 0 and 1 (for the statistically minded it is the p value). A number less than 0.05 indicates that there is little argument that can be made that seasonality doesn’t exist and as the number gets closer to 1 the higher the chance of there being no seasonality.

The table tells us that, in locations where there are extremes of climate, there is a seasonal growth factor. However, in moderate climates where there is very limited variation in seasons, there is limited to no seasonality. Hence, in Brisbane there is no seasonality while the market in Melbourne does have a quieter period in winter and in Darwin the market has a quieter time in summer.

This information is useful and important in understanding how a market is travelling. The seasonality Residex measures and shows simply indicate if the market is doing better or worse than normal. It should not be used to tell people what has happened to the value of their property.

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June 2011