In a heated property market do sellers’ price expectations become inflated?

It is a commonly held view that people looking to sell their home and agents who act on their behalf, have a sale price expectation far ahead of the reality of what buyers will actually pay. It is logical. Why would a seller not pitch a price at least a bit above what they would expect to get. Additionally, in a heated market, one would expect these expectations on the part of sellers to become further inflated to the point of outright greed – Right?

Well it seems that in general across New Zealand, sellers seem to be demonstrating restraint and setting a price expectation that is actually moving close to the selling price – or seen from the other perspective buyers appear to be paying closer attention to the price expectations of sellers!

Is sanity creeping into the property market?

Here are the facts based on the last seven years – a period that started as the property bubble peaked in 2007 and has taken us through a property crash and a property resurgence.

Over the past seven years the median asking price as analysed by all new listinga added to Realestate.co.nz has risen from $400,000 in January 2007 to $495,000 in March 2014; whilst the median sales price as reported by REINZ has risen from $327,000 to $440,000 last month.

As would be expected the asking price has remained ahead of the selling price, but that margin has actually decreased over the past seven years from a premium of 205 to 25% to nowadays 15%.

UPDATE: I have at the request of a commenter added this modified chart of the variance of asking price to sales price using 12 month moving average data thereby removing any seasonality.

This trend is very clearly seen when the data of asking price and selling price is tracked on an index basis where the January 2007 data is set at 100. Here the rise in the median sales price can be seen growing faster than asking price over the past seven years.

Asking price in the past seven years has risen by 23% comparing March 2014 with January 2007, whereas sales prices have risen by 35%.

Possible Explanations

So why would it be that asking prices has not kept pace with selling prices? Here are couple of explanations that I would put forward:

It's a sellers' market and buyers have to be price-takers if they want a property

The most recent three-year period at least has seen a very strong sellers' market where inventory levels have been historically low coupled with low finance costs and ready access to lending. This has created the most recent property inflation spike, which has set the media alight with expectations of a bubble. Such media coverage tends to invoke the 'herd mentality' which creates an environment where buyers lose negotiation leverage as the power switched to sellers – buyers then have to accept that they need to pay to secure a property they want or fear loosing it.

Agents are taking more care in appraising properties as a consequence of new legislation

The most recent changes to the Real Estate Agents Act came into force in 2009 and one of the requirements of the act was to require all agents when undertaking an appraisal and before a signed license agreement is completed, to provide the vendor with a written appraisal document, which must include an indication of expected appraisal price for the property. This price is then often used as the listing price for website search range – the "hidden" price which drives the search engine of the website without a specific price being published. This requirement of the act is likely to have driven a behaviour among agents to be more accurate (and thereby less inflated) in estimating a sale price.

Agents are becoming more conscious of the role of the web and pitching prices to suits searching

In some ways as a follow on from the last explanation, the last seven years has certainly seen a significant change within the real estate industry in the appreciation of the role of the web in property searching and discovery. As this transformation has occurred, agents have come to realise the importance of the price ranges and this may well have led to asking prices entered as search prices being set to optimise the exposure of a property when people are searching. Although this alone may not have caused this narrowing of the gap between asking price and sales price, in the early period of the past seven years the likelihood was that most agents delegated the task to office administrators who may have been given a range of price search and taken upon themselves to enter the range of a specific figure.

Reliance on industry automated appraisal systems for that are powered by less timely sales data 

Most agents use one of the automated appraisal tools offered by Terralink with Property Guru or Property IQ offered by Core Logic – both of these are themselves powered by the database of settled sales from the LINZ database. This database is on average at least three months older in terms of data than the REINZ sales data, which could cause a lag effect, therefore depressing the potential price inflation factor evident in the market.

In my view, it is likely that all of the above could be contributing to some degree to this trend of a convergence of asking price and selling price. I certainly don't expect them to converge. However, they are both key indicators of the property market with the measure of asking price being correlated to property sales as I analysed a couple of months ago in relation to the Auckland market.