On 23 March 2013, I noticed a couple of properties in the Manly Daily scheduled for auction. In the Sun Herald the following day, there were four pages on property with wonderful news about excellent auction clearance rates and lots of happy smiling faces. No mention of the two Manly properties.
A couple of days later, I ran into a friend who lives opposite a house in Roseville that was on the market. “Has it sold yet?”, I asked. “Yes”, she said. “Last Thursday, but they accepted less than they wanted”. Strange, I thought, I can’t remember seeing that result in the paper. So I went to the library and read through the Manly Daily, the North Shore Times and the Sun Herald for the weekend of 23 and 24 March. Here is what I found out.
According to the North Shore Times, 1502 properties were on the market with 439 scheduled for auction and 1063 for sale. In the Manly Daily, the figures were 1674 in total, 261 for auction and 1413 for sale. The auction clearance rate was 78%, which RP Data described as “auction properties that sold on or prior to auction this week.” As the auction clearance rate is widely used as a barometer for the health of the property market, the message appeared to be that the property market was getting its mojo back.
Flicking through the Manly Daily, I noted that there had been 21 auctions scheduled for 23 March, christened ‘Super Saturday’. In the following day’s Sun Herald there were 313 auction results listed. 193 successfully sold the property at auction, 79 were sold prior to auction and the remaining 41 were either passed in or had vendor bids.
Three questions sprang to mind.
First, if the percentage of properties going to auction is less than 30% of all the properties on the market, why are we looking at auction clearance rates to gauge the state of the market?
Second, if 40% of the properties included in the auction clearance rates were actually sold prior to auction, then why are they included in the auction clearance figures? I have experienced ‘sold prior’ myself. We scheduled an auction for a unit we wanted to sell. Many people inspected the property but with a few days to go, the agent told us there was really only one potential bidder. His advice was that going ahead with the auction in that environment could be disastrous. It was highly likely that no-one will bid, and worse still, the solitary prospect may realise they were the only game in town. When the agent ended up negotiating a pre-auction price with the buyer, we were very relieved. Including a sale like this in the auction clearance figures is completely misleading.
Third, how come there were only 313 auction results listed in the Sun Herald when there were 700 advertised in the North Shore and Northern Beaches alone? I was surprised to see that not one property was sold in Roseville, Lindfield, Killara, Pymble and Gordon. And none of the 21 advertised Northern Beaches auctions were listed either.
However, there was a photograph of one of the Roseville properties on page 5, under the headline “Super Saturday lives up to its name.” Next to the photo of the property were some figures: 1985 $235,000, 2013 $1.75 million, 644% rise.
Very impressive, except for two major issues.
First, the property hadn’t actually sold, it was what the vendor was hoping to achieve. And second, the current vendor bought the property for $1.89 million in September 2010. Instead of a 644% profit, if they sell at their asking price they will realise a loss of more than 12% if costs and stamp duty are factored in, assuming they did not spend any money on renovations or improvements.
So why did none of the 21 advertised Northern Beaches auctions appear in the following day’s Sun Herald? The data came from Australian Property Monitors, and they told me they didn’t receive the information from the real estate agents in time to pass it on to the Sun Herald.
Manly Daily and North Shore Times source their information from RP Data, and RP Data also supplies the Sunday Telegraph. What did the Sunday Telegraph publish, I wonder?
The Sunday Telegraph on 24 March had published over 750 auction results, more than twice as many as the Sun Herald, including two thirds of the Manly Daily auctions. In contrast to the Sun Herald, 18 of the 21 Manly Daily auctions were reported. 10 were passed in, 3 were withdrawn, 3 sold prior to auction and 2 sold on the day. That’s not my idea of a successful ‘Super Saturday’. And why did the Sunday Telegraph report more than twice as many auctions as the Sun Herald?
Eventually, all results find their way into the Valuer General’s office, and you can find out exactly how much a property sold for by logging on to various internet sites. Some of these sites try to assess what a property is worth, and sometimes they are pretty accurate. However, sometimes they are incredibly wide of the mark. For example, one of these sites had a house in Roseville valued at between $1.83 million and $1.94 million, and claimed it was a ‘good guess’. Er, not quite. Happily for the owners, it sold for $2.65 million last week.
What about the property industry’s use of median prices to measure the state of the market? The ‘median’ is the middle price with as many prices below it as above it, which is not the same as the average price. This means that the measurement of how the market is performing is entirely dependent on the performance of the few houses around the middle. This can create massive distortions in what is actually happening.
And what nobody factors in to the price performance is the cost of renovations. Not much reward from buying a house for $500,000, spending $250,000 on extensions and selling it for $800,000 a year later, but the statistics will show a 60% per annum improvement. When someone buys a Commonwealth Bank share, they don’t have to pay for a new roof on their local branch from their own pocket.
I am left with an uneasy feeling about how auction prices are recorded and reported. Contrast my findings with the availability of information about sharemarket prices and performance where bid, offer and sale prices are published instantaneously, and the entire history of selling prices and volumes is available at the push of a button. The market is regulated by the ASX, and investors are reasonably informed about what is going on.
When someone buys shares they are usually investing a relatively small amount of money in a liquid, transparent market. But when someone buys a property they are investing a huge sum of money in an unregulated marketplace that is illiquid and opaque. Residential property is the biggest asset class in Australia, worth about $4 trillion or almost three times the value of all listed companies. Buyers and investors deserve a better understanding of what is actually happening with prices.