If you keep an eye on what’s happening to house prices, you will have been confused by a REINZ report that said house prices in some Auckland suburbs are way up and others are significantly down – by as much as 30 percent.
So what does it all mean? Are house prices really dropping?
It depends on your perspective. According to that same REINZ report, house prices in Auckland, in March, were down by 2.7 percent on the same month in 2018, overall – so it’s still very much what commentators describe as a ‘flat’ market.
Of course, that’s small comfort if you own a property in one of the suburbs which has dropped in value – but I’d wager that the two figures that matter most to you are what they paid for your home and what it’s worth now and, if you bought your house ten years ago – or even five years ago – you’re almost certainly miles ahead on what you paid, regardless of any recent fluctuations in your area. If you bought one or two years ago, you may be down on paper – but it’s all relative.
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More to the point, stories about movements in house prices can’t actually tell you what your house is worth. This is because different measures are used to actually report house price changes – and these can only ever be averages based on a group of sales. This is because – short of listing the sale price of every home sold – there’s simply no way to give a more accurate result. Instead, the agencies which measure such things typically give you a figure which compares the average sale price of a group of recently sold properties in a given area or suburb against the equivalent figure at an earlier point in time (usually a year ago).
Logic would suggest that the best way to do this would be to add up the value of all the houses sold and divide them by the number of sales to get an average sale price, but there are problems with this methodology because the result can be skewed by homes of very high or very low value.
For this reason, most commentaries use something called the median price which is arrived at by picking the sales price figure which is the midway point in any set of sales data. In other words, the median price is the sales price where half the sales are above it and half the sales are below it. Basically, it’s the middle number.
Even using this measure, sales figures are heavily dependant on the data available – and this can be corrupted by an unrepresentative imbalance in the type of dwellings being sold or a low number of sales from which to draw a conclusion – which is why you can get wild fluctuations in your results such as may have been the case with the REINZ figures.
Let me give you an example. If three houses sell for $800k, one sells for $400k and three sell for $200k – the ‘average (or mean) price’ would be $485k - but the ‘median price’ would be $400k.
Which is correct? It depends on your definition of correct, but I would argue that both are only really useful as a guide to a general trend, over time. Both can give you an insight into what’s happening to house values in your area – but neither can tell you what your home will actually sell for. In the end, only the market can tell you that.
By the way, when you’re reading the headlines about house prices and sales, there are three other measures to be aware of. These are sales volumes, listing volumes and time to sell. All of them can be useful but reference to them can also be mischievous if you don’t understand what you’re looking at.
• Sales volume tells you whether the number of houses being sold, or cleared, has increased or decreased between two agreed points in time. It’s a useful guide as to whether houses are selling, but don’t be fooled by headlines which blare “sales down” when quoting this figure. It’s not a guide to price.
• Listing volumes are a variation on this and measure the number of properties being listed at any given point in time. This is a useful guide to confidence, or lack of it, in the market.
• Time to sell measures the decrease, or increase, in the average number of days that it takes to sell a home. Again, it’s a useful guide to confidence, but not price.
My point, as I outlined at the beginning of this article, is that the value of your home is relative, and personal, to you, and all a market report can do is give you a guide to trends, over time. But even if you did buy at the height of the market and the trend of house prices in your area has gone backward, time is your friend. Unless you sell during the low point of the cycle price indications are meaningless – and if the market follows the cyclic trend of the past 40 years, you can expect your homes value to recover, and then some, over the next few years.
- Ashley Church is the former CEO of the Property Institute of New Zealand and now writes on behalf of OneRoof.co.nz
