Why Does Generalised Commentary Help No-one?

It’s fair to say that the introduction of the internet in the real estate space has seen a vast transformation in the amount of information we have available to help us better understand the values of property, but in reality the average consumer is still being short changed with the data that really matters.

I recently read an article about a 12 month critique of two national property investment publications which each year name 100 hotspot suburbs.  They had reviewed the top 21 suburbs for their performance over the past year.  In their assessment they based their critique on median house and unit prices, which resulted in most of the suburbs, based on this assessment criteria, recording little growth or no growth at all.

As a property investment analyst and advisor it’s important that we measure performance – as it’s this performance which helps our clients create wealth and it’s ultimately what we are judged on.

The frustration I get from these types of performance critiques is what did it really mean for someone who invested into one of these hotspot locations.

Let me pose a hypothetical but very plausible example.

Say you read that “example” suburb was selected as a hotspot location.  As a novice investor, you simply go into this market and buy the newest rental property you see with your limited research.  Say you selected a 4 bedroom, 2 bath property that is only 2 years old and you pay $550,000 for it at the time at the time when the median price was $495,000.  Now let’s assume this location didn’t go so great based on median values and it recorded a drop of 2% for the year.  Using this very ‘generalised’ measure of performance this would make the value of the property you bought 12 months earlier worth $539,000.

So what made up this median value measure, because the median measure is the midpoint value of a series of numbers?  In this example let provide 5 sales values:

$460,000, $475,000, $485,100, $512,500, $630,000  – $485,100 being the median, so based on the previous median of $495,000 this would represent the -2% growth figure.

What if 12 months earlier you bought a 3 bedroom 1 bath house for $399,000 instead of $550,000 and all these figures represented the sales of houses over this period, are we right to assume that this property had a 2% fall in value?  I would strongly argue that this wouldn’t be the case because based on these sales it is more than likely that the lower valued properties may have been dragged up in this simple illustration or at the very least it is hard to tell if the value has fallen if all sales results for houses are higher than what we paid.  Furthermore it would highlight the need for a greater sample of sales to truly determine the value growth or decline in value of a single asset.

However, the important point I want to highlight is that median house and median unit values mean very little in my view regarding a suburb.  To get a truer picture of value one needs to establish the median value by type of dwelling and number of bedrooms.  For example if I owned a 3 bedroom unit but the vast majority of apartments in the suburb were 1 bedroom units, I am going to be the victim of lower median value generally speaking.

Furthermore, in doing ground breaking research you should also be studying one of the fundamental demand driver indicators, and what’s that you ask?  Auction clearance rates, but again its primitive research if you are looking at clearance rates being reported by city.

You should be at the very least be analysing clearance rates by suburb for basic demand indicators, but the real science is in following clearance rates by dwelling type and number of bedrooms or rooms (depending on which state you are following).  Imagine holding the knowledge of where ‘real’ live weekend demand is tracking to ensure you buy in an area experiencing or about to trend up in demand, you will have a far greater chance of experiencing an outperform result from your purchase.

So the challenge is how do you obtain this data?

Well in truth it’s painstaking work, and in our business we have a research team collecting and analysing this data, so we are best positioned to ensure our clients are ahead of the pack, that’s why clients use us.  For ‘Joe Public’ unless you have a spare 10 – 20 hrs a week to dedicate to such analysis you are at a disadvantage to those who work at it full time.

As I mentioned in my intro, you are being short changed with the generalised data you have available that will help you make better decision with your money when it comes to property, but it’s clear to me, most people wouldn’t have a clue given the vast amount of generalised information they are fed.

The best decisions are made using the best data analysis.