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Alistair Helm explains how the median price statistic is being misinterpreted as a valuation - and skewing the expectations of sellers and buyers. Agree?

Alistair Helm explains how the median price statistic is being misinterpreted as a valuation - and skewing the expectations of sellers and buyers. Agree?

By Alistair Helm*

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

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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.

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

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25 Comments

Tis lucky that no one has to work, has to have an income anymore.
Just buy a lemon with borrowed money, sell a ticky tacky house after a lick of paint, rinse and repeat.
Who buys it, yet another property investor, leveraging up for the next round of not working.
Whose debt are we in??.
Whose sublime, sub-prime model are we recreating??.
No work, no play, no harm, no foul. What a way to rebuild an economy.?
Forever upwards.?
We are all rich.?
 

Oh dont forget the  little bit of landscaping

...and the paint inside and out should be white, with a new white kitchen with reconsituted stone benchtop (in white) to maximise flick on price.

My work involves my being in many different houses and can I tell you that what you just described is exactly what I find time after time, sterile, cold and bor-ring

...and most importantly a white picket fence

$400,000 to renovate these houses; that's more than the typical NZ house would sell for - land and all. What does that say about the real value of our Kiwi homes? Just confirms what I had suspected - the level of deferred maintenance and significant items nearing the end of their useful lives must be massive. 
A typical thirty year old home could well have the roof, floor coverings, plumbing, window joinery, kitchen, bathrooms, fencing and paving needing to be replaced in the next few years. It is also likely to have wiring, insulation, drainage and foundation issues as well.
So why would you be restoring these old wrecks, they only look like 100 m2 or so. You could build something far better - high quality, architect designed and properly positioned on the site for less than that. Have I missed something?

These are all in Residential 1 zone. Demolition is not allowed without a serious Resource Consent.

Thanks Bob, I suspected there was a perfectly irrational explanation, these old houses have their values heavily distorted by weird planning rules. The rennovations are costing more than the replacement cost of the building for an inferior result.
Just shows how we should treat the statistics with great caution, as Alistair says. 

In the central suburbs renovated villas and bangalows are also much more valuable than a modern build.  If you knock down and rebuilt you will be lossing money.  Even at the peak of the auction crazyness last year modern 'executive' homes were not selling and sitting on the market with an asking price for weeks.  You could get 4 or 5 bedrooms plus internal double garaging for under a mill when an old villa, no garaging, in the same street would go more like 1.2

I don't doubt renovated villas are more sought after than some of the box like monstrosities you see. They have grace and character, even if they are not so great to live in and are often badly oreintated on their sites. The California bungalows are superior I think - they were also built by real artists with quality materials.
We are in the process of building and have made it our policy to avoid anything trendy in the design - the "look at me" type of thing or in the fittings - square tapware with rightangle bends. Please! A lot of this crap is just a vanity excercise for the designer and owner and will quickly date. Perhaps the Auckland villa buyers aren't as foolish as you might think.

It's also much harder to get a high mortgage ratio on a green/brown field site.
Dear Bank, we want you to give us ! Million dollars, with security as this house which we're going to knock down. Love, Speculator.

Yeah, nah.

It always costs more to renovate as the building is a bit more niche and much harder to get momentum up on parts of the job.  Brownfield site work is a challenge because cost of materials removal and often dated services that need finding and replacing, and foudation work will usually go in different places to earlier works.  A greenfield site, means rip in with mechanised equipment, tear everything up fast, throw down your foundations where you want; then do all lumber work, all using standard procedures (not having to marry-up old with new), roof the lot, wiring, insulate, wall claddings, gib stop, paint etc.  In a renovation you're working inside the old framework, materials going in have to work around materials going out (clean up is heavy piecemeal work with little profit).

And despite what the article says...you will still have an old house at the end of it.

The other problem is that they use the 'medium' price, rather than the 'mean' / average price. 

Rob
It's "median" price not "medium".
Median does not mean "medium or average"
Common mistake - but don't do it again.
 

Big daddy, that was autocorrect that caused median to be spelt that way. But my point is that they should be using the avergage price, and not median, as average is going to be more accurate , especially in areas where very few ahouses are sold, or in areas where there is a place where more higher value houses are sold then lower ones. 

"Provided the valuation subsequently obtained is from an acceptable valuer and meets our criteria, it will be accepted," an ANZ spokesman said.
http://www.stuff.co.nz/business/industries/10028617/Property-valuers-cry-foul
 

Valuation story- Talking with my mother today. Near her in Dunedin had a 3 bedroom place sell at auction with multiple bidders 2 years ago for around 235000. This weekend it is back on the market done up (interior, kitchen, bathroom, nothing external, no roof or foundation work not that there was anything wrong with either) and has an advertised "official valuation" of 310000. This would seem a bit high for local knowledge given the neighbourhood area she is in, even if I hadn't heard the previous price. I think this valuation may reflect more about some valuers than a sudden boom in the Dunedin property market over the past two years.

I saw this comming a mile away.
Banks are the ones that need the valuation done to be sure the property is adaquate as security.
It should be up to the banks to sort the valuation out and use a valuer they trust, instead of a mate of the 'property tutors' guys who adds an extra 50k to everything he values in south auckland so investors can 'recycle the equity' and buy another couple. 
Banks need to know, if buyer defaults, the house can be sold to cover costs. Its for there own good.

A Bank can always ask for a updated valuation or approved valuer if they don't believe the numbers....
Problem is moral hazard, they get money making loans, if it's dodgy then it doesn't matter as long as the risk taker buyer is prepared to put the effort into it, or if enough is paid off to see the loan covered on mortgagee sale.

QV update the GV after renovation only if you ask and pay ($250?).
A fix for misleading stats from reno's; Make it compulsary to get GV updated after spending over 10k on a reno. Very hard to police however...

and the flipside in such a regime, should you be required to get an updated GV every 2-3 years that you spend not a single $ on maintenance or renovation on a property?

I take it we can bill the costs for those reports for frequent GVs to you personally?

Maybe leave it to real estate agent to tick a box confirming property has not changed materially condition wise; if property has through the owners actions (or lack of actions) had a significant change in condition (either for better or worse), then QV valuer brought in to update GV.
Really no other way around it; if you want more accurate data.  Valuers would love it, more work for them.  Who pays?  I dunno.  Would be an extra kick in the teeth of owners who have had tennents devalue a property, to then have to pay a valuer to confirm the loss of value before sale.
Basically, no easy fix.  But don't let perfect get in the way of very good.  QV data isn't too bad.  I look at actual houses sold in areas of interest, find an ad (often left on internet for weeks/months after sale) to gauge condition myself, then assess what my properties would be worth in light of a number of these local sales.  So you can get a good idea yourself if your willing to do the market research on a specific area. 

Housing is the majority needs of many people, but its best a proper relocation is needed before demolition targeting informal settlers.

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http://caldwells.com/

Property prices fluctuate and are still fluctuating as we speak. There is no degree of preciseness that can guarantee a certain price margin to even be labelled as median. We can never be too certain to gauge how the prices will turn out to be like but we can still study the past trends. However, what we will achieve is just a rough guide so as to prepare ourselves on how hefty the price tag will be like.

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