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Alistair Helm shows how to look behind the vested interest of real estate industry stories based on 'statistics'

Alistair Helm shows how to look behind the vested interest of real estate industry stories based on 'statistics'

By Alistair Helm*

I remember hearing somewhere that it was bad news that sold newspapers - apparently not so when it comes to property ...

... or so you would imagine if you read the recent headline from the NZ Herald detailing the September results from Barfoot & Thompson.

The headline: "Auckland house prices rise to a record, as more million dollar homes sell".

Reading the article after I had reviewed the numbers from Barfoot & Thompson's report on their website got me thinking.

How different the article and quite possibly the headline might have been if the reporter had reviewed the data rather than just the press release.

Here are the first two paragraphs of the article as published:

“Auckland house sales rose in September, snapping three previous months of decline, as more houses with a $1 million price tag pushed the average house price to a record, according to Barfoot & Thompson.

The number of sales rose to 959, from 909 in August, although below the 1,105 sold in September last year, Auckland’s biggest realtor said in a statement. The average sales price rose 3.8 percent to a record $738,876, and was 12 percent above last September’s average house price.”

Now let me using the source data from Barfoot & Thompson September report and provide an alternative two paragraphs:

“Auckland houses sales continued to fall in September, the 8th consecutive months to see sales fall on a year-on-year comparison. Significantly sales of properties in the $400,000 to $600,000 price range saw falls of 22 percent.

The number of sales at 959 were 13 percent below September last year, Auckland’s largest realtor said in a statement. The median sales price continues to go sideways at $635,000, a trend that has been seen for 4 months now since a peak of $645,000 was reported in May.”

The facts are simply the facts.

It is just that the NZ Herald decided to copy and paste the press release from Barfoot & Thompson and I chose to spend a bit of time looking at the key facts. 

When it comes to reporting on the property market and presenting facts there are some key points to bear in mind that are critical to helping make a more informed decision as to the article:

1. Sales data is only relevant when compared with prior year.

Property sales are seasonal. There is no value in comparing one month with the prior month unless it is seasonally adjusted data.

Here is the representation of Auckland sales by Barfoot & Thompson to demonstrate the state of sales:

2. Average sales price is not an accurate and trusted measure in property sales reporting.

The range of property for sale especially to the high end of value can have a significant impact on the average price. Let me show you.

Lets say that the September 2014 sales had been the same - 959 but instead of 161 sales over $1m there had been just 146, 15 less properties sold over $1m (that 146 sales is how many properties sold for over $1m last September) and then lets say that an extra 15 properties sold at say $700,000. This scenario would have seen an average price of $710,000 - that is $28,000 less than the actual all for the sake of 15 properties! - that is how misleading it is to quote average prices.

3. Median price or better yet the Stratified median price is the most respected and trusted method of tracking house prices.

Here is the median price for Auckland properties sold by Barfoot & Thompson measured by median price which shows the levelling off.

4. Real estate companies have a vested interest in presenting favourable articles based on statistics.

They want to be seen as selling more than other companies or reporting higher prices or indicating that it is a great time to buy or a great time to sell or that there is a shortage of listings or a massive selection of listings.

All of which as you can judge are often conflicting situations, 

As a final thought, researching the quote that 'bad news sells newspapers' I came across this article from The Guardian ( a media source I trust) who in a 2007 article on just this subject made the observation "peoples' interest in news is much more intense when there is a perceived threat to their way of life".

It got me thinking - of course rising house prices, especially at the level they have attained in Auckland are what might be thought of as a "perceived threat to their way of life" - so maybe in the case of property news good news is actually bad news and the team at the NZ Herald are the smartest guys in town.


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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Great article Alistair.
It's surprising how many people are unaware of what you have described perfectly. Well done!

22%, yet didnt someone say earlier that these houses were selling like hotcakes?
ho hum.

Fantastic article and spot on.

Excellent analysis and the same thing a few of us have been saying for a while now. But unfortunately the mainstream media aren't interested in reporting the facts which is almost a crime as it inflates vendor expectations in a market where prices need to fall to reinvigorate interest as we have passed the "affordability" barrier.
A correction is due. The best that can be hoped for for owners is a long period of flat prices (5 years) waiting for incomes and rents to catch up. But given we are in the early stages of a global market correction this would be optimistic thinking. A 10% fall across the board is more likely.

The LVR efect == "Auckland houses sales continued to fall in September, the 8th consecutive months to see sales fall on a year-on-year comparison. Significantly sales of properties in the $400,000 to $600,000 price range saw falls of 22 percent."
This would be consistant.
Now if you look at Steve Keen's work the domino effect of the Austrailians first time buyer grants is a multiplication of leverage up the value chain.
using the OZ example (with rough math),
So say a FHB is limted to 400k.  They have 10% deposit so 40k with a max of 90% lending, they can borrow 360k.
Throw in $8k first time lenders cash, they know have 48k deposit.
For the same house they can now, with 90% afford to pay,  480K.
The seller now with 480k "cash" instead of A$400k cash can afford a more expensive house, rinse and repeat up the property ladder, a domino effect of rising prices.
Now look at the opposite a LVR restriction of 80/20 all of a sudden that FHB is crippled buying wise.  The properties the FHB can buy now have to drop to meet the a 22% drop is consitant with the huge effect of a 80/20 effect.
Of course 95~96% mortgages were not uncommon in NZ? noe down to 80%.
Really it looks like the NZRB over cooked this number I think, unless it did so on purpose of course and Im suspecting so, otherwise they are grossly incompetant.
Yet we see that the high value houses are still selling well, but if the LVR effect is so significant just where is the money coming from?  These high end houses are not rentals surely?
NB What would the rent be on a $1m property?  $800 a week?   (more?) how many people can pay $800k a  week in rent?
So where is the cash coming from?

You ask - where is the cash coming from?
Take a long hard look the following article and apply your domino-ripple effect
Look carefully and you will see all the tell-tales - they're all there - loud and clear - if you look for them
All cash - no finance required
The real question is where is the "cash" going

Re high value houses: Suppose someone has owned a house for a while that has significantly gained in value. Then they are likely to have high equity. For example, bought at $700,000 with 10% deposit, then a number of years later the house is worth $1,000,000. They now have at least $370,000 equity (ignoring principal paid over the years). $370,000 is 20% of $1,850,000. So you can see that LVR restrictions do not affect anyone that is already on the property ladder. This is its major shortcoming, IMO. 

Debt capacity is a restriction for people already on the property ladder.  Whilst technically you could buy a $1.85m house with a $370k deposit (20% LVR), the weekly mortgage payment would be roughly $1,900 at, say, 5.5% p.a. for 30 years.  At a tax rate of, say, 30% that mortgage would require earnings of $144k p.a. before any other expenses (car, rates, living, etc).  
Someone borrowing $1.48m ($1.85m - $370k) is speculating on continuing capital gains and low interest rates unless they have significantly higher earnings than $144k in order to live.  In that case I'd assume they would also have a higher deposit. 
If they are renting the property out then they would likely have to subsidise the rent to cover the mortgage payments.  Anecdotally, I recently saw a $3m, 5 bedroom house in Herne Bay seeking tennants at a weekely rent of $1,850. 

While my original example of the home owner being able to borrow up to $1,850,000 is not likely to happen, a more reasonable scenario is likely:
Following from my example above, suppose the home owner had paid back a principal amount of $200,000. Their equity is now 570,000. Suppose that they are now earning more (as happens in life) and wish to upgrade to the tune of $300,000. They can borrow this money without LVR restrictions. However, a first home buyer wanting to buy a house worth $300,000 must have $60,000 to avoid high LVR lending. If the situation were "fair" (in terms of ameliorating house price inflation) both home owners would have to front up with $60,000. 

Great article, but in that last sentence I think you give the Herald far more credit than they are due, as your opening paragraphs show on their mis reporting of the facts. 

I think one additional point which could have been added is that the Herald obviously benefits substantially from advertising in their paper.  And a lot of money is spent on advertising houses for sale... consequently it's in the Herald's best interests to be positive about the housing market. 

Great article thanks Alistair - always appreciate your analysis

All very well writing a cynical article trying to be contrary and that black is white.
Try telling that it's all bad news and prices are falling to the tens of thousands of homeless, houseless people trapped in poverty.
And why are all the powers that be call for more houses to be built?

Hey Dad,

Pollies want house construction to kick along local business activity and tax income. Its the one activity not to be off shored...

Abso value dont matter to em so long as banks lend...

A dollar is not worth what it was....

Alistair Helm makes out he has just invented the wheel.
Too bad the Olly Newland beat him to the story by more than 10 years:
 “The Day the Bubble Bursts”
June 6th 2004,
Many people are predicting a property crash is immiment. In this latest book "The Day the Bubble Bursts" Olly Newland writes about how you can profit from the upcoming property slump.

Link here:

60% of stats are made up on the spot.. so it's hard to tell.

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