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How can the median price be rising when property sale prices aren't rising?

This is not a conundrum: it is in my opinion the reality of the situation in today’s market and has led to these fairly striking statement by some leading economists:

Westpac's Chief Economist Dominick Stephens said “It is impossible to tell what is really going on with house prices.”

New Zealand Institute of Economic Research (NZIER) principal economist Shamubeel Eaqub said “trying to forecast house prices has been a mug's game.”

The reason for these statements is the conflicting data coming out from REINZ and from QV – specifically the March median price data, which showed an accelerating rise in price from 8.2% year-on-year growth in February to 9.2% in March set against a fall in sales of 10% and QV reporting that the rate of price increase was easing. In a single month REINZ reported the median price of New Zealand property had risen from $415,000 to $440,000!

There has even been questions as to the accuracy of the REINZ data. This is not something I believe, or have any insight into, but such comments certainly demonstrate the concern in the market as so much value is attached to the timely and accurate indicators of the property market by so many sectors of the economy.

I have long advocated the use of the REINZ Stratified Median price index as a more accurate methodology for tracking the true indicator of the price of property sales across the country. However, even this measure, long trusted for its lack of volatility has of late shown some wild fluctuations. 

Tracking these fluctuations over the past 20 years as the chart below highlights shows that on a three-month moving average basis the recent decade has shown a normal fluctuation range of $3900 from month to month. This was a higher level of volatility when compared to the 1990s when the volatility was less than $1700 month to month.

In the past three months this volatility has spiked, with the three months average for the 2014 year so far showing a volatility month-to-month exceeding $11,000 – a highly volatile situation.

So why is it that we are seeing this volatility?

In my opinion the iLVR restrictions are having a greater impact on the property market than is currently being acknowledged.

Let's look at the facts:

  • sales of lower priced properties are down – the data is reported by both REINZ and in the Auckland market by Barfoot & Thompson. 
  • overall property sales have already come off their peak and are easing – 10% down in the year to March.
  • the retail banks have demonstrated an ‘over-correction’ to the Reserve Bank-imposed 10% criteria for high LVR lending, resulting in upwards of a 90% fall in the approval of 80+% LVR mortgages.

To better assist in understanding how these indicators might be contributing to the volatility in the median price I have developed a hypothetical scenario of the composition of the property market sales in a month. Then I compared this with a subsequent month where the underlying property prices remain the same year-on-year across all price sectors, where sales volumes remain unchanged across all price sectors, with the exception of the lower priced end of the market and let me show the impact.

Here is a hypothetical normal distribution of property sales in say March 2013 – 5082 sales with a median price of $400,000 and for reference an average price of $507,000

Now let’s jump forward to March 2014 - let's reduce by 23% the sales volumes in the price ranges $225,000 to $400,000 - just these price ranges. All other sales volumes by price range remain identical to the year earlier.

The outcome of this impact (the hypothetical impact of the LVR restriction) is shown in the chart by the marginal sales reduction in red across those price ranges.

That 23% fall in sales across those lower priced properties segment leads to an overall 10% fall in total sales to 4,567. The median price, though, went up by 8% to $431,000 and the average price went up by just 4% to $528,000.

This model is designed to demonstrate that what we could be experiencing is two components of the property market working in complete isolation.

The majority of the property market is plodding on unaffected, with no change in year-on-year sales volumes and not experiencing any price appreciation. In those sectors directly affected by the LVR restriction the sales volumes have dropped by 23% but equally with no price change amongst those sales. The net effect, though, is that the signal being sent out to the market through the median sales price is that property prices overall are rising in an inflationary manner.

A classic situation where aggregated statistics belies the true situation.  

Former CEO Alistair Helm is founder of Properazzi.


Comments and questions

A most sensible summary. The "sky is falling" statistics we keep getting quoted about house prices are more a reflection of what is getting sold rather than a valuation of a representative cross section of the NZ housing stock. I recall that about 10-12 years ago, the median house price in Auckland was actually the same as that in Napier - the Auckland figures being massively skewed by the number of shoe-box apartment sales happening at the time. Today, the market reflects the sale of lots of new builds (with their expensive double glazing and other high spec features that did not exist 40+ years ago) while the old 1970's bungalows (with poor spec's) are being retained as rentals. Isn't it time for some real analysis of the "problem". This article is a good start. Thanks.

This is a hot issue these days, i m reading alot of paper news about this issue of rising prices in properties in particular areas and people demand for an action by the government last year but nothing being done so far for the rectification. Is it government that behind all these issues and they wont let it solve that easily or is there something else that needs to be discover to get it resolved? The question is still unanswered.
al reem island apartments

Good work Alistair!!! At last a thoughtful contribution on this subject and a sensible effort to figure out what is going on. Only when you understand how the shape of the distribution of prices over time is changing, can you understand the impact of policy and purchaser behaviour. Only then can you adjust policy for the best effect.This might be called evidence based policy formation ...

The median like the average is a measure of the central point of a distribution. The median is more resistant to distortion from outlier prices than the average is. The result is that where there are a larger number of lower value properties than higher value properties, the average will be more volatile than the median, but the median will be affected as well. More statistical analysis allows a more boring but better understanding. Although it doesn't make for sexy headlines or sound bites, meaningful statements in this space require understanding a little more about statistics and choosing appropriate policy settings require more than hysteria, knee jerk reactions, and political point scoring.

The problem with QVRP and their stats etc is that it is peopled by Valuers who thought that with their higher intellectual platform they could provide all sorts of interesting data and analysis on the marketplace and make money out of it because other scources were defficient and they alone understood the market better.They are slowly realising that the property market is transaction driven irrespective of the worth of their analysis and thats a blindspot for them and by drilling deeper they actually become further divorced from the marketplace.What they havent been able to do is understand the drivers and they never will because they are analysers of past events.They are in many cases producing things that buyers and sellers dont need or want so they wont make money that way.