At times I have to confess I get a bit lost in analytics and data analysis, trawling through the reams of property data available - I love to seek out trends and then try and interpret the correlation.
I have come across just such an interesting correlation and am curious to postulate some rationale behind the correlation and see what others think.
The correlation is that there is an inverse relationship between property sales volumes and the alignment of the asking price of property to the eventual sales price.
That is to say that as sales volumes rise then the differential between asking price and selling price lessens, whereas when sales volumes fall the gap widens.
Or put another way, sellers seem have a more realistic price expectation in a rising market - not what I might have thought.
I was prompted to this correlation when examining the current trend of asking price to sales prices over the past 5 years.
The source data I have looked at is the Stratified Price Index from the Real Estate Institute and the Asking price from the Realestate.co.nz NZ Property Report which uses a 80% Truncated mean price.
I have chosen to examine the Auckland market specifically as it has witnessed sizeable movements in both volume sales and prices over the past 5 years.
In the past year the asking price for Auckland properties coming onto the market has actually fallen below the sales price, or put another way the pace of sales prices has outstripped asking price.
This was the beginning of the data trend analysis.
I next added the data of property sales over the period and tracked this against the variance of sales price to asking price.
The red line represents sales tracked on the left hand axis whilst the grey line tracked on the right hand axis shows the percentage variance of sales price to asking price with the parity level marked at the 0% horizontal line. A very clear correlation is seen albeit the monthly fluctuations make the chart a trifle messy.
Applying a 12 month moving average to the data sets though provides a clearer picture of the correlation.
So having established this correlation, the question is how can this best be explained?
Here are some thoughts:
1. Property sales are a lead indicator of price movements and as can be seen there is a lag in the trend correlation of anywhere from 3 to 9 months. If asking prices are set based on current market demand and sales prices follow by a lag then the gap between asking price and sales price will narrow as sales consistently grow.
2. Asking prices are set more by agents than by vendors, as sales pick up agents are motivated to sell and therefore set more realistic expectations of asking prices especially at the early stage of sales growth. On the downside as sales fall agents hold out for a more optimistic selling price than the market would indicate.
3. In Auckland as we are so often told a majority of property is marketed without a published price and often for sale by auction. The asking price is created by the website search price which is not public. Therefore it could follow that as auctions become more popular (as sales growth takes off) the search price is set at the bottom end of price range expectation to attract attention which leads to this narrowing in the gap. Conversely the fall in sales drives less auctions and more realistic search range pricing.
4. The widening of the gap between asking price and selling price is possibly explained by the fact that expected asking prices still reflect an optimism by agents to see price continue to rise when the reversal of sales growth actually seeing property prices fall.
Whatever the explanation I think it is interesting to see just how close asking prices have come to the selling prices - the property sales have though started to tail off and therefore the acid test will be if the gap between asking price and sales price widens driven by continuing growth in asking price expectation.
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The above article was written by Alistair Helm, and is republished with his approval. The article was originally published on Properazzi here
7 Comments
Why are asking prices so high? Oh come on, real estate agents will be pumping up the prices in order to get the listing, you know how it goes "Oh but XYZ Real Estate gave me $50,000 more" as if the property had been bought and sold already.Once dotted lines are signed a few weeks of buyer feedback saying its overpriced, real estate agent grinds down the vendor to what was the more likely sell price in the first place.
That, and the prospect of interest rates rising.
Who do I send my bill to
Agree with point 3 about the influence of auctions explaining a lot of it.
Also as prices rise buyers have less bargaining power, especially when multiple parties are interested in same property. They don't won't to miss out so offer the asking price or very close to it.
I'm going to be thinking about this one (and how to approach the idea on measuring convergence) over the weekend, but would also add humans tend to make more realistic decisions in bigger groups because it is harder to be blinded by your own perception, so high volume period mean you have to do more cognitive work to deny reality.
Doesn't really seem like rocket science ...
In a "sellers market", buyer demand is high pushing market prices up to meet sellers expectations.
In a "buyers market", buyer demand is low, prices fall below sellers expectations. Many vendors at this point opt not to sell at all. The only houses that do sell are those that the vendor allows to sell at a relative discount to the expectations of other vendors.
This is exactly what you would expect isn't it?
"
asks why property price expectations are weakening as median sales prices are rising"
The title is phrased as if sales prices are currently rising. But median sales prices are currently dropping. "Auckland's median price fell $31,000 (-5.2%) compared to December"
https://www.reinz.co.nz/reinz//public/residential-news/archived-residen…
A bit of a reality check is required here. The samples over which the stats are gathered are small, therefore nothing meaningful other than 'less houses sold over the xmas break than throughout the year' can be determined. End of. House prices in Auckland will continue to rise rapidly until the cash rich Chinese find another haven globally. Auckland houses are still considered cheap by them.
I've been have a tink about this, and while I don't have the actual numbers to play with, from the graph it looks like Sales is a leading indicator, suggesting that if this is a genuine correlation that changes in the asking/settling price ratio follow a few months after changes in sales volume. If optimistically priced houses are selling easier in a bull market, but lingering in a less hot market then selling for less after a delayed reality check, this could explain a bit of the time element, but the only way to test this kind of thing I can think of would be to compare the general figures with the subset of houses that sold at auction at their first auction and I don't think that information is generally available.
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