Property panic: Don’t believe the hype!

With ever increasing media attention focused on our national property markets, sometimes it’s difficult to sort through all the information and statistics bombarding us. Whether it be on the TV, in the papers or on the radio, everyone wants to tell us how poorly property is faring. But what’s the real story?

One scare tactic over the past couple of weeks has been related to the latest results from the REIV, who claimed the Melbourne median house price dropped 6% over the last quarter. This has caused quite a stir in the media with headlines like “The Bubble Bursts” and property investors are asking, “Is the Melbourne market in meltdown?”

Even if you’re not Melbourne based, this is still very relevant to you, because if the powerhouse of the Australian property market is in trouble, we could all be in trouble.

Sure, real estate has slowed, however although the doomsday speculators would like us to believe this is the end of the world as we know it, the truth is there are always peaks and troughs in the property cycle – that’s just the way it works.

So, let’s try to make some sense of what all this means to home owners and property investors…

Back to the Melbourne figures – according to the REIV, the Melbourne median house price dropped 6% over the last quarter to $565,000.

REIV CEO Enzo Raimondo has an answer for this, saying it is related to affordability issues, the fact that there are 37% fewer first home buyers and that median prices usually dip in the first quarter. He then explains, “this will be welcome news for those buyers looking to buy this year.”

I’m not sure about that!

I’m one of the 70% of Australians who owns my own home and among the 1.6 million property investors in Australia, and hearing that values in Melbourne could have fallen 6% over the last three months is not welcome news to me.

But I’m not really worried.

Why? Because I didn’t believe the REIV statistics when they suggested the median price in Melbourne increased by 20% last year and I don’t believe their stats now.

At the end of 2010 the REIV (which only look at metropolitan house prices) said Melbourne’s median price had risen by 20% to $601,000 over the year. Let’s see what others said happened to Melbourne prices in 2010.

• Residex: median price – $593,000 – growth last 12 months + 10.05%
• RPData – median price – $483,000 – growth last 12 months + 3.6%
• APM – median price $574,850 – growth last 12 months + 14%

Why are they so different? Who’s right? Isn’t the median price easy to calculate?

Surely there can only be one true median price as it is a strict mathematical definition – it is the middle or 50th percentile observation. The median of a sample of homes sales is therefore the middle sales transaction if you lined up all those sales from low to high.

So why are they all different? According to Christopher Joye of Rismark the differences come from:

1) The data they collect;
2) The data they actually use; and
3) The accuracy and complexity of the index methodology they rely on.

He explains this in a great blog post here.

Even though I’m discussing Melbourne figures, what I’m about to share with you is just as relevant to the figures wherever you are reading this, so please stay with me.

When you dig deeper into the REIV figures you’ll find the median price in some suburbs increased up to 20% in the quarter and that of other suburbs dropped – some by up to 20%. No surprise so far as different sectors of the market are performing differently.

Take the suburb of Caulfield North for example – according to the REIV the median house price in this suburb plummeted 40% in the last year from a peak of $1,802,500 in the March quarter last year to $932,500 now.

Does this mean the value of every house in this suburb dropped by 40%?

Clearly not. Many houses in this suburb, which I know well, and other suburbs of Melbourne, are selling for a similar price or even more than they did last year.

What the median price shows is the composition of the sales data during the last year and that fewer high priced homes sold over that period, which means that the middle sales figure (the median price) was lower than 12 months ago.

Median prices for a city, or in fact a suburb, are a poor indication of what an individual property has increased or decreased in value. They don’t really indicate what has happened to the price of your house or mine.

All median prices do is indicate the composition of the sale prices in a property market over a period of time. Yet they are frequently quoted in the media and used for explaining what’s happening in the market.

The problem is we don’t have a market!

We have lots of property markets even in the one city. Our capital city property markets are segmented by price point and by geography. Even in one suburb some areas can perform much better than others.

Clearly our markets have entered the next stage of the property cycle, a time when the values of some properties will fall, others rise and some stay stagnant.

But is the market in meltdown – definitely not!

There’s no sugarcoating it… we are at that stage of the property cycle when there are more properties for sale than there are buyers. This means we are in a buyers’ market. But there are no desperate sellers giving away their properties at 20, 30 or 40% less than last year.

In a recent report in the Sydney Morning Herald, Dr Andrew Wilson, Senior Economist for Australian Property Monitors said: “Australia enjoys and will continue to enjoy one of the world’s most stable market-based housing environments.”

“Notwithstanding the usual cyclical ebbs and flows of market activity, long-term real growth in the aggregated market value of Australian housing is assured. The resilience of the intrinsic value of Australian housing is undeniable as are its drivers.” He explained that:

The principal drivers of stability and growth are:

• Optimised macroeconomic environment.
• Continued strong growth in household numbers.
• Significant supply constraints for new housing.
• Record growth in full-time employment.
• Real incomes growth through increasing shortage of labour.
• Low vacancy rates in rental market.
• Endemic home ownership culture.
• Controlled entry-level access to market through stable affordability barriers to first home-buyers.
• Regulated and prudential financial sector and housing risk mitigation model.
• Proactive government policy environment.
• Manageable taxation incentives for owners and investors.
• Increasingly divergent and independent housing markets.

There is no “Australian housing market”

Just as I have already explained, Dr Wilson said: “It is important to recognise that there is no “Australian housing market”.

“Capital city and regional housing markets are increasingly divergent in their market outcomes, although the underlying macroeconomic drivers will continue to influence activity, but at varying levels according to the nature of the each local market environment.”

“Capital city markets are also increasingly divergent in activity levels according to the impact of the various supply and demand dynamics on different price strata – entry level, mid level, prestige level.”

Dr. Wilson concluded: “A generalised collapse in Australian housing market value remains a fanciful and hopefully eventually a non-newsworthy concept.”

So what does the changing market sentiment mean?

Well I think we can safely deduce the following:

• Potential buyers are being more cautious and more selective.
• More vendors are putting their properties on the market hoping to achieve the prices they may have been able to achieve last year.
• Good properties are still selling – but buyers are being more selective.

The fantastic news for investors is that any slow down in the market will create opportunities for buyers who take a long-term perspective.

How does this work you may ask.

Well, life still rolls on. People are still getting married, people are still getting divorced, people are still having babies, our population increased by 345,000 people last year and so on and so on.

And the bottom line is this – bricks and mortar is an essential commodity – everyone needs a roof over their heads. And if they don’t buy a home, they’ll rent one, thus pushing rental prices up even further.

The point is – you really can’t believe the hype!

So, what can we believe? You can bank on the fact that in the long-term the value of well-located properties has doubled every 7-10 years, which means many properties have outperformed these averages.

So now could be a good time to take advantage of the buyers market. Of course, it’s only a buyer’s market if you take advantage of the opportunities and buy. If you’re trading up to a new house this could be a great time. If you’re an investor it’s a good time to take a long-term perspective and buy selectively.

Michael Yardney is the director of Metropole Property Investment Strategists, a best-selling author and one of Australia’s leading experts in wealth creation through property. For more information about Michael visit www.metropole.com.au and www.PropertyUpdate.com.au.