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
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.
The above article was written by Alistair Helm, and is republished with his approval. The article was originally published on Properazzi here