Why are Property Price Dropping?

IN THIS WEEKS HOW’S THE MARKET WE LOOK AT

• Median prices,?
• Spring hasn’t sprung yet,?
• The importance of the WOW Factor

Need to know

Do you know how the media and all these economists actually come up with the radical price drop predictions??

It’s all based on what’s known as the median house price, which is generally a blanket assessment of the entire market, meaning they look at either the whole of Australia as one, or the capital cities like Melbourne, Perth, Brisbane etc. Why is this a problem? Well there are a few reasons you need to be aware of including:

1. There are thousands of markets in Australia (15,353 different suburbs to be exact) moving at different speeds
2. The median is a better indicator of market activity rather than value; and
3. The median value is less reliable in downturns

To explain this I will use a simple example:

Imagine there is a street with 20 houses on it and in 1 year there are 11 sales of the following values: $550k, $560k, $590k, $590k, $600k, $760k, $770k, $780k, $800k, $850k, $900k.

In this data set, $760k is the median price.

If you look closely at the data you will see there is a big jump in prices between the top half and the bottom half. This is because there is a good side of the street which is higher up, north facing and has amazing views and then there is the low side of the street which doesn’t have views, is south facing and has generally inferior houses.

In this particular year there were more sales on the high end of the street which landed the median value in the top bracket, however, if the following year there were two more sales at $550k, the median value of the street could drop to $600k from $760k. This would not mean that the houses on the good side of the street are now worth less, it only means that less of them sold.

This shows that the median is a better indicator of market activity, rather than the actual value, which is where a lot of people become misled.

This point is especially important in a falling market like the one we are in now because, based on our conversation with agents in multiple markets as well as our experience looking for clients, it is apparent that there are significantly less A grade properties transacting this year compared to last.?

This may be because those who can afford the best properties are more secure financially and less likely to need to sell in tough times, leaving the majority of properties which are transacting to be in the bottom half of the market.?

This can easily manipulate the data so that it appears there are larger drops in price than what might actually be the case and why drastically reduced medians can be seen for this year so far. To me, this reflects that there has been consistent activity in the lower end of the market as this market including first home buyers and investors is generally more consistent, compared to a slow down in listings in the upper end of the market as they do not want to sell.

Whilst the median might not be the most reliable source of data, it is still more useful than the average of the data as that can be easily manipulated by outliers. It’s also worth noting that the median can be very accurate in homogeneous markets where the properties are all very similar, however, these markets are few and far between so you should always be critical of the data and review why it might be the case.

In the know - What agents are saying

As mentioned in previous weeks the market is delayed.

Spring is yet to spring, with agents stating that the vast majority of stock they have is currently online with Sep 17th being the big auction date before a lul over the school holiday period.

The general sentiment seems to be that agents are confident for a large end of year, though have also kept expecting to see increased listing numbers over the last couple of weeks which haven’t been there. A large jump in stock might still be coming, though it’s shaping up to be a quieter than expected end of the year.

As interest rates continue to increase, there is a fear amongst buyers and sellers alike with many putting off their purchase/selling decisions until next year.

Pro tip: Sometimes the best decisions can be to go against the trends of those around you. We have seen some A-grade properties achieve exceptional results as there has been virtually no other competition for them online. This is the same for buyers who turn up and are the only one at an auction. You may be able to secure a property in times like this below its typical market value.

The Wow factor!?

A wow factor creates scarcity and is often the reason why someone might go to their max to get a property. It’s important if you are looking to buy or sell for the wow factor in a property as it can often be the determining factor as to whether someone puts an offer down or not.

Check out this property in Mount Eliza! Pool = 10/10 wow factor.

https://www.domain.com.au/30-kunyung-road-mount-eliza-vic-3930-2018016718

In the media

This week we are looking at another article that is actually spot on from The Age titled ‘Testing time’: As Melbourne’s spring selling season begins, will property prices keep going down? .

This article paints a great outlook on the supply and demand that we are seeing on the ground with quotes from Michael Armstrong, a partner at Jellis Craig stating that October, which is usually their busiest month of the year, is forecasted to be much slower than normal.

“In a crisis, the typical behaviour we’ve seen is that people stop, and they wait to see what will happen and will wait until after it’s happened,” Armstrong said. “People who are 50-50 about selling this spring might be waiting to see what happens and will wait until next year.”

Final Thoughts

There are no doubts that the interest rate rises are affecting borrowing capacity and serviceability which is in turn lowering demand and reducing house prices. Though don’t fall for all the headlines stating 15% - 30% drops in housing prices and make sure to remember that the median price might not be an actual reflection of the value of house prices within the market. The median reflects market activity, more so than value.

If you made it this far, thank you and if you have any suggestions on what you would like covered in the future please email me at [email protected]

Happy Buying!?

Note: This is my opinion, please seek your own expert advice when making decisions.