There is something about the way real estate trends are reported that borders on the irresponsible. OK. Real estate is the single biggest exposure that Joe and Jill Average have to the economic cycle and people are naturally interested. I get it. But bearing in mind the level of herd behaviour involved in any market, media exaggeration of any figure that can be converted into a sensational headline can only fuel irrational exuberance and despair.
Are sick people ever just driven to hospital by ambulance? No. they are always rushed to hospital. Do real estate markets ever just fall? No they plunge and then reel and then plunge again. But don’t worry. if you hang in long enough they will eventually surge. All these are verbal commentaries on what looks like a pretty orderly statistical process.
The common thread in all these headlines is they use a measure of middle sale price (usually the median). The headline figures actually differ significantly depending on the data source (REIV or APM) and are possibly dodgy. But regardless of which figure you take, it occurs to me, and I am sure I am not the first to make this observation, that there is a potentially huge transaction bias* in these figures.
We are told that the first home buyer’s market is booming. So there are many more sales in the lower price range. So the median or mean sale price would go down, even in a flat market.
It would be nice if some adjustment were made for this. The obvious way to do it is to benchmark the “fair value” of each property before it goes to market, using its features (such as land size, floor space, age and suburb) and some kind of flexible statistical model – say a neural net or random forest (or just a very flexible regression). You then measure whether each property sold for above or below trend and report the average of this figure (say as a %) each month. You could use the previous 12 months of data with a rolling window.
I know that a team of MBA students at AGSM did something like this for McGrath and Partners in Sydney back in about 2001. But as far as I know their index (I am not clear if it became the McGrath APM Index) has never gained any traction with the commentariat.
According to the Herald Sun, Victorian house prices just suffered the biggest drop in 40 years. And now there is great speculation that the federal government will kill the first home buyers grant in their next budget and fear that this will cause the housing market to plunge and reel. If Kev does kill it, and if the first home buyers market does indeed suffer, then we will expect to see many fewer sales in this market segment. And so we will expect median house prices…… to surge.
* I am not sure if this is the correct term. I know it has another special meaning.