Don’t get hung up on median prices – Rich Harvey

Australia’s largest body of professional buyer’s agents is warning property buyers not to make their purchasing decisions based on median house price values alone. This has long been a beef of mine and I talk to Rich Harvey about why it is a mistake to consider median prices as an indicator about moving property values.
Transcript:
Kevin:  I was delighted the other day to read that Australia’s largest body of professional buyer’s agents is warning homebuyers not to make their purchasing decisions based on median house price values alone.
The Real Estate Buyers Association of Australia, REBAA, and their president, Rich Harvey, said that many buyers wrongly used median house prices as the benchmark for measuring growth. Well, I have to say I can’t blame them, because it’s all over the media. To join me to talk about this, Rich Harvey.
Good day, Rich. I get very frustrated about this. And I know I’m in the media, but the media seems to be so focused on saying what’s happening with the median almost as if it’s an indicator about what’s happening with the market.
Rich:  That’s right, Kevin. It’s a pleasure to be on your show again, as always. I like catching up with you. That’s always good, and I love the way you give insightful information to your listeners and readers, so always good.
Kevin:  Thank you.
Rich:  I’m a bit like you; it’s one of my pet topics as well. I get sick of the way misinformation is presented. It’s funny that media and median only has an N difference in the two words. But I always advise people, don’t put too much faith in median prices, particularly short-term median price movements. That’s what the media focus on.
They’re saying “In New Farm, the prices have dropped 5%,” and that’s off the basis of about four or five sales. If you’re looking at median house prices, you have to look over a one- to two-year time horizon as a minimum. Monthly medians have become meaningless in my opinion.
Kevin:  But median house prices have nothing to do with value; it’s really an indicator about where people are buying, rich.
Rich:  That’s right, exactly. I’ll give you an example. If you take Vaucluse in Sydney, where your median house price is somewhere between $3.5 to $4 million, in one year, you might get ten sales of $10 million – in that range – and suddenly, the median jumps up 50% to an $8 million median. But the following year we have a currency crisis and there are very few sales, there are a couple of sales around the $2.5 to $3 million mark, and the median might be $3 million. Oh, it’s dropped 110%. They’re wild fluctuations.
What people need to look at are repeat and comparable sales. You have to look at prices based on comparable sales. That’s the key thing.
Kevin:  Buyers move in and out of markets, and if you only have a few sales in a particular market, you can’t judge anything on the median. Aspirational buyers will buy up; that doesn’t necessarily mean that the values are going up.
Rich:  That’s right, correct. Even within a suburb, there will be types of properties that will be in higher demand and other properties that will be in lower demand.
One of the tricks is to look at the volume of sales in a suburb. If there is a high volume of sales of a particular type of property, that’s a pretty good indicator. If you can trend three-bedroom or four-bedroom houses as going up at a certain rate, you can actually get a pretty good gauge as to where the prices are going to go in the future.
But if you have a huge eclectic mix of apartments, townhouses, houses, and villas, all different species of properties, it’s a lot harder to track what capital growth might be.
Kevin:  Yes, indicators like stock on market. If you only have two buyers in a market and you have a hundred properties, well, I can tell you now that prices are not going to go up. It really depends on the balance between the amount of stock and the number of buyers in the market.
Rich:  Exactly right, that’s a much better indicator. Another good indicator is days on market. How long is it taking for a property to sell? At the height of the boom in Sydney and Melbourne, it literally got down to about 25 days on market. We’ve turned the corner now, and it’s in the high 30s, and it will probably get back to around the 50s or 60s – so one to two months, probably two months on average.
We’re not in a buyer’s market yet, but we’re coming out of a seller’s market in the two major capitals. It doesn’t mean that those markets are dead, but you have to be very careful how you read the tea leaves of the property market.
Kevin:  The bottom line here, Rich, really is read indicators like days on market, how long is it taking to sell a property, how many properties are on the market, how many buyers are in the market.
I’ve always found a good benchmark that if you have about six months’ worth of stock – in other words, if it’s going to take six months to sell all the stock in a particular area right now – then you’re going to have a fairly stable market. If it’s more than that, prices are probably going to be under pressure. If it’s less than that, prices are probably going to increase.
Rich:  It comes down to simple supply and demand, Kevin.
Kevin:  It does.
Rich:  You have to also look, as you said, at the volume of stock coming on the market. If you have some big land subdivisons and there’s going to be a flood of new lots coming on the market or some big apartment releases, there are going to be hundreds of new apartments flooding your market in a particular suburb, then that’s going to have a direct impact on prices in that market and it’s going to soften. There’s no doubt that will happen.
My advice to buyers: buy in tightly held markets at fair market value, do incredible research, but don’t just be misled by median prices.
Kevin:  Good comment from Rich Harvey. Rich is from the Real Estate Buyer’s Agents Association of Australia. He is their president.
Good on you, Rich. Nice talking to you, mate.
Rich:  Thank you, Kevin. Always a pleasure.

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