Real estate advice syndrome a common problem: Terry Ryder

A speaker at a seminar in Melbourne told the audience they should buy in a particular suburb because the median unit price had jumped 20%-plus in the previous 12 months.

I’m not sure I’ve heard worse advice in a public forum.

But it’s a common syndrome in real estate - one that defies all logic, but common nevertheless.

For many years I have observed investors getting excited about buying in a location because they read/heard that it had shown exponential price growth in the recent past. 

There are multiple reasons why this is a mistake. 

The first is that they would be buying in a location after the big growth has happened. Publicity-hungry research firms that publish lists of the highest annual growth are telling you where you should have bought a year ago – maybe. 

The second reason is that the figures show the rise in the median price, which doesn’t mean values have risen to the same degree. Given the way median prices work, it’s not uncommon for the median price to rise in an area where values have fallen.

The third reason is that the figures are often nonsense, wildly distorted by a small sales sample or a short time frame. 

Here’s a recent example. RP Data, a persistent source of worthless information on real estate prices, recently spat a list out of its computer of the five locations in each state/territory which had shown the highest price growth in the most recent quarter. 

Numerous locations on these lists had (allegedly) recorded median price growth between 25% and 35% in three months. 

If this represented actual growth in values at those levels, this would be the greatest real estate boom in the history of the planet. But it did not mean anything of the sort.  

In each case, it was a statistical aberration. There was not a single instance among those 40 locations where values were rising at the levels suggested. 

In most cases, the statistical glitch was caused by a small sales sample. More than half of the 40 locations had fewer than 30 sales in the previous 12 months, which meant the quarterly data was based on only six or eight sales. 

Some had only 10 or 12 sales in the year, providing a quarterly sales sample was just two or three sales. To publish median price results on samples so small is irresponsible as well as misleading. 

In every case – i.e. in all 40 locations – the RP Data growth figures were contradicted by figures from other research sources. 

RP Data claimed Harlaxton in Queensland had grown 28% in three months, but Domain recorded zero growth for the same location. RP Data said Cape Schanck in Victoria (a tiny market with only 14 annual sales) had grown 29% in one quarter, but Domain said its median price had actually dropped 1.3%. RP Data said Manjimup in WA had jumped 29% in three months, but Domain said it had declined 3% for the quarter and 1% for the previous 12 months.

The problem is that some media organisations, especially the online magazines, publish these furphies as if they’re nuggets of gold for information-starved investors. 

“Australia’s top property markets revealed!” shout the headlines. 

How can they be so careless?

A more accurate headline would: “Australia’s worst misinformation exposed!”

TERRY RYDER is the founder of hotspotting.com.au. You can email him or follow him on Twitter. 

Terry was recently joined by Property Observer editor at large Jonathan Chancellor for a webinar on why research is the key to successful property investing in 2015. You can download slides and audio from the webinar here.