Information overload: Your guide to defeating data paralysis
“According to [acronym], the [numerical estimation measure] of dwellings in [area] is up [percentage/percentage point] from [date] to [figure]. The result has [industry figure] recommending that now is the time for investors to [buy/sell/do nothing/panic].”
Property investors would be forgiven for feeling a little exhausted. Each day it seems there’s a new price measure, hotshot commentator or industry body with a brain bending acronym. How do you navigate all the charts, figures, data providers and advice to make the best decisions – without the aid of a statistics course?
Even the Australian Securities and Investment Commission (ASIC) think information fatigue is a problem. In their submission to the 2014 Financial Submissions enquiry, ASIC wrote:
“Regardless of their demographic characteristics or level of experience, many investors were overwhelmed both by the volume of information available, and the difficulty in assessing the validity of the available information.”
As journalists, we generally try to follow the “pub test” – that is, explain issues to readers as we would to a friend at the pub. But when the property game is all about numbers, how do you deliver information that’s easy for readers to digest and apply?
With the majority of Australia’s wealth wrapped up in real estate, it’s no wonder that home owners and investors are keen to get the most accurate information possible about the housing market. The trouble is figuring out what the best information is, and who it comes from.
THE PROVIDERS
There are a handful of national data houses in Australia that provide housing data, each with their own strengths. They include:
- The Australian Bureau of Statistics (ABS)
The Australian government’s data body has been around since 1974. Before that, the national body was known as the Commonwealth Bureau of Census and Statistics, which has a history extending back to 1905.
The ABS is widely regarded as having the most dependable housing transaction, construction and economic data available in Australia. However, it often releases data less frequently than some of the private housing firms. The ABS releases its Residential Property Prices Index and housing finance data on a quarterly basis.
The Bureau’s quarterly building activity release, its twice yearly average weekly earnings data and its population statistics, among many others, are all useful to investors. - RP Data
Owned by CoreLogic, a company listed on the New York stock exchange, RP Data releases median house and unit sale prices and listing information like auction numbers, time on the market and clearance rates. They also produce the Daily Home Value Index with Rismark International. The Index tracks the movement of property prices on a daily, monthly and quarterly basis by suburb, capital city, state and on a national basis.
The RP Data-Rismark Daily Home Value Index is used by the Reserve Bank of Australia (RBA) and is the index provider to the Australian Stock Exchange.
Cameron Kusher, Robert LaRocca and Shana Miller of RP Data regularly contribute to Property Observer. - Australian Property Monitors (APM)
The Fairfax owned Australian Property Monitors has been providing property data since 1989. It tracks median prices and sales volumes, and listing information like stock on market, vendor discounting, days on market and auction clearance rates.
To read what APM's senior economist Andrew Wilson has to say about Australia's housing market cycles, click here. - SQM Research
Headed by Louis Christopher, SQM Research runs a residential research division that provides information on asking prices, stock on market, vacancy rates and rental yields.
The data provider also releases a range of reports detailing distressed and discounted properties on the market, performance by postcode and national forecasts.
To read SQM Research's latest data on vacancy rates, click here. - Residex
Residex is owned by the Australian stock exchange listed Onthehouse Holdings. Residex releases information about suburb, city and state median values, median sales prices, rental indices and price indices. Some of their indices go back to the 1970s.
Residex founder John Edwards has recently warned that Sydney's market is approaching a "boom mentality." Read more. - Real Estate Institute of Australia
The industry body is made up of professionals in the real estate industry, who provide data to the Institute’s state and territory subsidiaries on median prices, rents and rental yields, listings and auctions. Each state Real Estate Institute also tracks sentiment according to survey results from its members.
President of the Real Estate Institute of Western Australia David Airey is a regular contributor to Property Observer.
Researchers face more demand than ever to provide up to date, comprehensive property data. As the number of information sources grows, as does the availability of that information, thanks to the internet, there are bound to be discrepancies between each research firm’s results.
According to John Edwards, consulting analyst for Onthehouse and founder of Residex, the difference in results often comes down to methodology.
“Different results are primarily caused by the use of different statistical measures than anything else,” he says.
Tom White, the general manager of APM Pricefinder, says that small changes in calculation methods can make a big difference to a researcher’s end result.
“Simple differences in opinion, such as the date of a transaction, which could be the contract date or the exchange date, have marked effect on the results different information providers publish,” says White.
“The calculation methods we use are an accepted benchmark of many years standing also used by the ABS and developed and endorsed by the Reserve Bank.”
The high stakes nature of the property game can mean that commentators occasionally find themselves at odds over data discrepancies. In a 2011 newsletter, SQM Research’s managing director, Louis Christopher, accused the Real Estate Institute of Victoria (REIV) of providing “a deceptive representation that auctions are a successful way for vendors to sell real estate".
“What is happening to real estate information in Victoria is a disgrace,” he wrote.
“The Melbourne auction clearance rates that are currently being published by the REIV are inaccurate and misleading.”
The REIV’s president Enzo Raimondo hit back, saying: “Mr Christopher is a past employee of the Fairfax-owned data company Australian Property Monitors (APM) who left that company’s employ under a cloud and has a history of disputing REIV research.”
Hotspotting.com.au’s Terry Ryder, a regular contributor to Property Observer, has also called the REIV’s data into question.
Meanwhile, Fairfax’s property publication Domain released an article earlier this month noting that the Fairfax owned APM’s figures “showed 3 per cent growth during the March quarter, which was certainly closer to the official Australian Bureau of Statistics figures of 2.4 per cent for the quarter than RP Data’s 4.8 per cent.” RP Data chalked the “huge disparity” up to different methodologies.
So what exactly are the different methodologies – and which ones should we be paying attention to?
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There are a range of different measures that will shed light on a certain housing market. These include population growth, employment figures, borrowings, construction figures, buyer demographics, auction clearance rates and housing values.
Value and price estimates tend to be given the most airtime. They’re easy to understand and easy to apply, while it’s not always clear what impact a local construction boost will have on your wealth.
Here’s a guide to the most regularly used price estimates.
STATIC PRICE ESTIMATES
- Median
The median is the “middle value” of an ordered group. Say we’re talking about “median sale price”. All the known properties sold in a certain time period are ordered from the lowest sale price to the highest. The middle value (the 50th percentile observation) is the median sale price for that time period. Though the median value can give you a rough idea of what’s going on in a certain area, keep in mind what you’re dealing with.
As the ABS states in the explanatory notes for its Residential Price Index: “half of all properties (in the same region and of the same dwelling type) bought/sold in the period did so at a price below the median, the other half had a price above the median.”
- Mean
Also referred to as the average, the mean sale price of a particular area is calculated by adding together the sale prices of all properties sold in the given time period, and dividing by the number of properties sold.
That leaves it exposed to outliers – that $52 million trophy home or the $100,000 shack can go a long way in skewing the end result, especially if there weren’t many sales in that period. For that reason, the median is the most commonly used single value estimate.
PRICE MOVEMENT ESTIMATES
But a single value estimate is only so useful to a property investor. Most players really want to know the dynamics of the game. Are prices going up or down? How quickly are they moving? Is there a long term trend at play, or just a seasonal fluctuation?
- Change in median price
You have the median sale price from January, and the median sale price from February. You figure out the difference as a proportion of January’s median price, and you’ve calculated the percentage change in median price over a month. It’s so simple, even a journalist can do it – which partially explains its wide use.
Unfortunately, it’s not the most illustrative measure, for a number of reasons.
Vito Mollica is a lecturer at the Macquarie Graduate School of Management. He was formerly a member of Rismark International’s Portfolio Management & Research team, who generated the RP Data-Rismark Hedonic Price Index using RP Data’s data set. According to Mollica, the arbitrary selection of a median price in each time period can obscure real price movements.
“The median price series takes all of the properties in a particular period and region and selects the 50th percentile observation. It does this between two comparative periods and determines whether the property market goes up,” he explains. The problem is, the house with the median price in one period might be vastly different from the median priced house in the next.
“You might be looking at a two bedroom home in the first period and a three bedroom home in the second period,” says Mollica. So the median price might be up by $100,000 from one period to another, but that might be because the first “median” home was a two bedroom cottage, and the second was a four bedroom villa.
Mollica doesn’t recommend that people pay too close attention to changes in median price.
“A median price is interesting so people would have a feel for a particular area,” he says. “But it should not be used to influence [your idea of] whether an area is growing.
“People are using median prices to shed light on affordability,” he says. “‘If I was to take a property in a certain region, how much would that cost me?’ But that’s a very different question to asking whether a particular area has gone up down.”
- The repeat price method
This method requires following properties that have sold more than twice over a certain period of time, and calculating the change in their values from sale to sale.
Mollica explains. “Let me look at the property that sold today, and I’ll only include it in my index if I have a previous data point for it, so I can track the growth from a previous period to today.
“It estimates the regression and allocates the growth based on assets sold over 10 years, 5 years, 3 years, whatever.”
Unfortunately, this method can introduce sample selection bias, as it measures changes in certain properties that have attributes that can influence those changes.
“But how many properties sell more than once? And is there something associated with properties that sell more than once? There’s a sample selection bias,” says Mollica.
“Properties that sell frequently might be in not so great areas. And using repeat sales for Sydney, it’s typically the more affluent properties that seem to turn over more.” Results from the repeat sales method might be skewed – if you’re only measuring changes in property values at the top end, you might think growth in a certain area is much more conservative than it is in reality.
The repeat sales method also doesn’t take into account changes that might have been made to a property.
“It makes a big assumption as to whether it really is the same home,” says Mollica. “It could be a knock down and rebuild, or renovations.”
- Hedonic price indices
An index number reflects a quantity (of dollars, in the case of a price index) in relation to a designated base value. That base value might be the price of a home in 1990, and is given the number 100. If the price in that area is now double the base value, the current index number would be 200. The presentation of these numbers as a time series makes an index. Think of the Dow Jones Industrial Average, the Consumer Price Index or the S&P/ASX 200.
The ABS produces a Residential Property Price Index for the eight capital cities. But an index in and of itself does not necessarily solve the problems we ran into with median prices or repeat sales – if the nature of homes in an area change over time, or the homes that are sold in one period are vastly different from the ones sold in another, we might get incorrect expectations of our own property’s price potential.
In comes a third method – hedonic price indices. Hedonic regression tries to identify how the component parts of a product can contribute to its price. How does the number of bedrooms affect price? What about land size? Pool or tennis court?
“Hedonic methodology controls for the fact that there are differences between properties between periods and between geographies,” says Mollica. He describes the method as “stripping out the fact that you have variance to find out the underlying growth in an area.”
“It’s the method that most accurately adjusts for compositional bias,” he says. “If there was a data base that had property attributes, sale date and regions, no one would ever calculate a median price index. Because there would be no point.”
But there’s a catch. “The issue is that you need to make sure your data covers all the component parts,” says Mollica.
That level of detail all depends on where you get your information from.
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“If you think about how a property transaction occurs, there is the buyer, agent, lawyers and the Valuer-General,” says Mollica.
“These are the people who eventually know what a property’s sold for and when it’s sold.”
The sources of information introduce three key complications – sample size, detail and time.
Some researchers only use information from the Valuer-General, who records the sale of every single property on the market. While the Value-General presents the biggest sample size, the information comes with a big time lag, thanks to settlement times. That means that on average, the Valuer-General is receiving information an average of six to eight weeks after a transaction has occurred. According to Mollica, “that’s a huge issue.”
“There are over 250,000 listings at any given week - about 236,000 advertised for sale currently. If you have that many houses up for sale where you have 30-50 days to sell, and then six to eight weeks before it’s reported, that’s a huge time delay.”
The ABS might use the biggest range of data, but their results are released up to three months after a transaction has occurred. While that may be useful for someone tracking long term trends, tracking ABS housing data might mean that the next bargain suburb has already taken off.
Others data providers such as RP-Data use information from real estate agents – but there, the more timely and more detailed data comes at the expense of scope. Real estate agents can report how many bedrooms or bathrooms a property has (rather than just the land or building size that comes with a property’s title), but there’s no way to ensure you have information from every selling agent in the country. If you’re not using the Valuer-General’s data, you’re only working with a sub-sample of traded housing stock.
The compromise between scope and timeliness is well known to White, of APM Pricefinder.
“APM PriceFinder recognised this as an issue years ago and pioneered the collection of auction results each and every weekend. Combining auction results as well as private treaty sale reports from agents all around Australia gives APM PriceFinder the information we need to provide agents and consumers real time analysis on property markets,” he says.
“These collected results however often only represent a percentage of the market and we are working with governments and other agencies on ways to increase the speed the government bodies report transactions.”
But no matter how complicated the picture looks now, the quality of information we have access to today is better than ever.
Edwards says that the Onthehouse group, which includes Residex, has seen a big shift.
“Residex has collected data for more than 25 years. Over that time there have been very significant changes,” he says.
“Gradually, there has been a general acceptance by agents that it is in their best interests to help organisation like Residex, because of the significantly better quality of market information that is available.
“Agents now generally accept that having more transparency generates interest in their market, and it allows them to better inform their clients. There is now a symbiotic relationship that did not previously exist.”
And so the quest for better information continues. Playing the property investment game well requires more than just a steady hand – you also need a clear head. So pay close attention to the numbers, and when you feel a case of data paralysis coming on, don't panic. Just step away from the screen and dust off your old maths text books.