'Wildly inconsistent' housing market figures: who can you believe?
Figures quoted for housing market growth can be wildly inconsistent and should be treated with caution
Real estate consumers need to understand that they cannot place blind faith in the price statistics published in the mainstream media.
When I described Australia's price data confusion at a seminar for property investors, many in the audience were incredulous.
Some had believed that if a national newspaper told them Sydney prices had risen 15%, based on figures from a well-known research entity, then that was a fact to be relied upon.
If a research report portrayed a 10% decline in Darwin apartment prices, this was information you could take to the bank.
I showed that audience how different the reality was. With scary regularity, figures about prices from one source are contradicted by data from others.
In a nutshell, the problem with price data is this:
- There are a number of property research houses in Australia, each with a different methodology in calculating price levels and price growth in the major cities.
- Figures from one source are often different from those published by others. Sometimes the differences are quite stark - for example, one source says the market is rising while another says the same market is falling.
- The media do not make this clear. They report each set of figures in isolation and as fact.
- This puts consumers at risk because investors base decisions on published data, unaware of these broader issues and problems.
As one example among many, news.com.au reported on February 3: "Figures released by CoreLogic show that Sydney house prices rose 15.5% in 2016 and jumped a further 2.7% in January."
The information is presented, without qualification, as fact - but the reality is, it's not fact. It's merely one view of the real restate world from one source. I don't suggest that the figures are wrong but that another set of figures will soon emerge from another source to paint a different scenario - and this, too, will be presented as fact, without any reference to the differences.
It raises a question that sits at the heart of the debate about house prices, affordability, debt levels and the threat of bubbles bursting: how much did Sydney house prices grow, on average, in 2016?
According to the latest figures from the Australian Bureau of Statistics (ABS), they grew at the annual rate of 3.3%. Many readers would regard that as reliable information from an authoritative source - indeed, the "official" government numbers.
But Louis Christopher's SQM Research, a highly respected data source, said the growth figure for Sydney was 7.5%. And Domain, part of the Fairfax media empire, reported the Sydney growth figure as 10.7% while CoreLogic, whose data appears in media more regularly than any other source, claimed Sydney house prices grew 16.7% in 2016.
3.3%, 7.5%, 10.7%, 16.7% .... how can there be such differences in something that most consumers would consider to be a matter of fact?
Even within the one research organisation, there are contradictions. Domain senior economist Andrew Wilson says adopting one approach provides a 2016 growth result for Sydney above 10% but another approach provides a growth rate of just 4.4%.
There were similar differences from the four sources (SQM, ABS, Domain and CoreLogic) on house price growth in Melbourne, with annual growth rates ranging from 8.3% to 15.1%. For Hobart, two sources suggested annual price growth around 6%, while another said 10.3% and a fourth reported 11.7%. For Canberra, the claimed growth rates ranged from 5% to 12%.
All four sources agreed that Darwin house prices had fallen over 12 months but the rate of decline varied from 0.2% to 4.7% to 8.5% and 10.5%. Darwin was either levelling off, with prices down by less than 1%, or was still in dire straits, with a double-digit decline - depending on which source you believe.
The average annual growth rate for house prices across the eight capital cities was either 4.1% (ABS), 5.5% (SQM), 7.7% (Domain) or 11.6% (CoreLogic).
Many writers and commentators have held up the CoreLogic figure as evidence that "Australian house prices" are still soaring, apparently oblivious to the other reputable sources with lower rates of growth.
At Hotspotting we often highlight these differences. We compare the latest figures on price growth in the capital cities from different sources - and the variations are often stark.
At one point last year, CoreLogic reported a 10.2% annual rise for Darwin's apartment market, while Residex recorded a 10.9% decrease. One portrayed a boom and the other a marked decline.
SQM said Hobart's apartment market is up a rather spectacular 21.7% but Domain reported an 11.7% decrease in the prices. One set of figures contradicted the other but both were reported in various media outlets as fact, without challenge. Some media coverage shouted about a boom in the Hobart market, while other articles said the market was tanking.
There are similar discrepancies with rental statistics.
In June 2016, SQM Research said Hobart unit rents were down 1% but CoreLogic said they were up 15%. Residex said Melbourne house rents were down 2.2% but CoreLogic said they were up 2.4%.
Residex recorded a 2.2% drop for Sydney houses but SQM reported a 3.3% rise. One source said Darwin apartment rents were down 9.6% and another said they were down 28.6%.
The Reserve Bank has expressed concern about the quality of some of the published data. In August 2016 it was no longer using statistics from CoreLogic because it believed those figures to be inflated, especially for Sydney and Melbourne.
Wilson agrees price statistics are a quagmire of inconsistency and confusion. He says the many differences in methodologies used by research entities result in contrasting results. Changing the parameters or the time frames can yield starkly different outcomes.
He says one approach by Domain results in Sydney house price growth of 15%-16% in 2016 while a different method yields a growth figure of just 4.4%.
How is that possible?
Wilson says the December 2015 quarter was a weak period, influenced by the APRA crackdown on investor lending. But the December 2016 quarter was strong, thanks in part to a rate cut in August. Comparing prices in the strong 2016 quarter with prices in the weak 2015 quarter yields a change of 15%-16%.
"The variability between those two December quarters gave an extreme result," says Wilson.
But if you compare all sales in the 2016 calendar year with all sales in 2015, you get different median prices and a growth figure of 4.4%. In other words, 2016 overall was only 4.4% stronger than 2015 but the December 2016 quarter was 15% stronger than the December 2015 quarter. Change the parameters and you greatly change the growth result.
CoreLogic bases its price data on what it calls a hedonic home values index. Domain uses a composition-adjusted stratification index based on settled sales, while SQM publishes an index based on asking prices. CoreLogic publishes figures based on month-to-month changes but Domain maintains this time frame is too short and uses quarter-to-quarter figures.
"Even quarterly data sets can be unreliable," says Wilson.
These methods are all quite different, which partly explains why the outcomes are so contrasting and emphasises why reporters should never treat anyone's figures as fact.
"Yes, it's messy," says SQM Research's Christopher. "Each data provider has its own methodology and it does make it very confusing for home buyers and property investors. It's probably more confusing right now than ever before.
"In the past there wasn't enough information out there for consumers but now there's just too much and it's made more confusing by a media content to publish numbers which have been debunked by an authority as big as the Reserve Bank."
It's a serious situation. Consumers base big investment decisions on the published figures.
I've heard investors talking about their intention to buy in Sydney because they read that prices are still rising at a double-digit rate. They missed the other media coverage that suggested prices were rising at much slower rates.
Wilson says the figures themselves are not the problem so much as the simplistic way in which they are reported.
"The bane of my existence is the arguments over methodology," he says.
What consumers should do
We've arrived at a point where real estate consumers should treat everything they read on real estate prices with several grains of salt.
They should avoid basing big investment decisions on data from a single source. It's important to look at all the published information and try to see trends in the figures.
It's also important to understand that the published data for each city reduces price growth patterns to a single figure. This can disguise all sorts of different activity in various market precincts.
The Sydney metropolitan area has over 700 suburbs and they're not all the same in terms of where prices are heading.
One good method is to ignore all the media static about price levels and growth figures.
Property investment is a long-term venture and a smart investor will disregard short-term events and look at the long-term fundamentals, such as location, infrastructure, proximity to jobs nodes and factors that may boost a market in the future, such as proposed government spending on transport, medical or educational facilities.