Almost every potential house buyer, at some point, will have asked, “What are house prices doing at the moment?” It’s an understandable concern - especially now when the economy and the housing market are in uncertain waters as the country gets to grips with battling the coronavirus. No one will want to purchase a house today for $800,000 if they know it's going to be worth $760,000 next month or next year.
The problem with house price figures is that the vast majority of data buyers use is spread over entire cities. “Auckland house prices moved by X percent” is a common headline. But Auckland, like New Zealand's other major metros, are big places and house prices aren't uniform.
Looking at house price data at a suburb level can give buyers and sellers a much clearer picture of how much each suburb has performed over the year, but what might not be apparent from the figures alone are the reasons for changes in values or price variations between similar or neighbouring suburbs.
The reasons for price variations at a suburb level are vast but, as an example, could include:
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- New infrastructure making one suburb more accessible to the city or airport;
- House prices were previously over-valued in one suburb (meaning they dropped as a result) and under-valued in another (meaning they can more easily increase);
- A large local business could have shut, meaning local employees were forced to sell at reduced prices.
Number One and Two would be easy to predict, as new motorways are known about for years ahead of opening and trends in particular suburbs can be looked at to see what is over-priced or under-priced.
Number Three is harder to predict and may be more relevant in the post-Covid 19 world. It is almost impossible to know if a significant local employer will close and cause a shift in the market.
Outliers that affect house prices in suburbs
What about outliers? There are plenty of suburbs that have a wide range of house values. An analysis of sales in the Karori area of Wellington in the last quarter of 2019 showed a range prices, from $350,000 to $2.4 million. It wouldn’t take many sales at the “upper end” of Karori's housing market to show a rise in the suburb’s median sale price.
What is "a drop in price" anyway?
While we're on the subject of house price movements, a significant amount of people may disagree but it's arguable that a five percent drop in property values is not a technical "drop". A property bought at $800,000 that drops to $760,000 is a $40,000 loss - even if it is on paper. But if you listed that property, it would not be unusual for someone who absolutely loved your house to come by and offer $800,000 for it. On paper, it's worth $760k but in reality, your house is worth what the highest bidder offers on the day.
I would therefore argue that anything less than a 10 percent movement (higher or lower) is simply a market fluctuation. Until you extend outside those boundaries, anyone could walk in and meaningfully alter the sale price of your house compared to your valuation.
So when we are quoted in the media as saying something like "house prices may not move significantly or may reduce a little", you could take this to mean "current prices, plus or minus 10 percent, but more likely down a little bit". Intentionally vague? Sure, but market fluctuations are unpredictable like that.
Adopt a new strategy
So what does the above mean for home buyers? My recommendation is that buyers avoid thinking about house prices and try a completely different strategy.
One, find out what you can afford. There is no point searching for your new property unless you know what you can afford. Talk to your bank or a mortgage broker to do the calculations on what you can afford with your deposit and income.
Two, take a good look at the properties that are on the market. This is extremely important. You need to know what you can get for your money.
Let's say you are approved to purchase a home of $700,000. You need to inspect at least 20 homes in that price range to find out what you can get for that price in terms of the number of bedrooms, section size and location.
Sooner or later you will come across a house that suits your needs and your budget. If you don't, you'll know you need to reassess your budget or your expectations.
Historical data can be helpful in many situations but for many buyers the data that counts most is what's happening in the market now.
- Rupert Gough is the founder and CEO of Mortgage Lab
