Despite its ubiquity, residential property remains one of the least transparent asset classes in Australia. With the exception of a small minority of sophisticated property investors, most buyers spend hundreds of thousands of dollars on an asset which they know very little about. In many cases, the information buyers possess is even misleading, most notably in Melbourne, the auction capital of Australia.
No better example is the listed “clearance rate” published by the major newspapers. Clearance rate information is calculated by the Real Estate Institute of Victoria and also by Australian Property Monitors (which is owned by Fairfax), while RP Data is also understood to be publishing clearance rate data.
While Australia is in the midst of a property bubble with prices across many suburbs at record levels, it could be the case that part of that reason for the boom is the hysteria whipped up by self-interested parties, especially real estate agents (although artificially low interest rates and misguided government stimulus are the prime culprits).
The fear that (often young) home buyers need to buy now to “get in the market” is underpinned by what appears to be extraordinarily high “clearance rates” — that is, the percentage of house auctions which result in a sale.
The auction “clearance rate” is published weekly by the major papers, including The Age, Sydney Morning Herald and the Australian Financial Review. The Age receives its data from the Real Estate Institute of Victoria.
The REIV, as Crikey pointed out last year, has a somewhat chequered history with accuracy. Some even claim that the Institute intentionally ignores certain data to make to make the property sector appear more buoyant than it actually is. The conspiracy theory is not completely without foundation. Remember, real estate agents make money by selling properties. During slumps less people sell properties which means less commission for agents.
But it isn’t only the Real Estate Institute which appears to be providing inaccurate clearance rate data.
SQM Research, a leading independent property advisory group noted on Sunday that:
The number of unreported results has risen dramatically from last year. In every city, based on the APM results at least 10% of listings are not being reported. In Melbourne, the situation is very alarming with over 60% of listings not being reported to APM on the day. It is understood that APM (and RP DATA) make up for this deficit in Melbourne by monitoring the published REIV results over subsequent days.
For all cities, the clearance rates reported by the reporting bodies and subsequently published by the major papers assume the unreported results NEVER EXISTED. They are left out of the clearance rate.
This situation was noticed in Melbourne by Crikey last year when it conducted a comparison between the listed auctions in Saturday’s Age and the results the following day. It was observed that there was serious discrepancy between the data. In many instances, the REIV would simply not report houses which ‘passed in’ (although in the REIV’s defence, it is also possible that agents simply did not report the poor result). This created the impression of a far higher clearance rate than what really was the case. Agents and the media will then claim that the high clearance rate is a leading indicator of a property boom.
Not only is the clearance rate data somewhat suspicious but Real Estate bodies have a tendency to be somewhat flippant with the truth regarding vacancy rates.
Last year, Media Watch exposed data published by the Real Estate Institute of NSW as being utterly false. The Institute had claimed that in all of Sydney there were only 739 vacant properties. The Institute’s own figures suggested that the number would be around 5,000, while leading property experts noted that the actual figure was probably around 20,000 — almost 30 times the number claimed by the Real Estate Institute.
Any asset bubble, be it shares, property or tulips, is only able to inflate if investors are naïve enough to ignore fundamentals and believe spin.
So far, if property prices are any guide — the spinners are winning.
Hmmm … this article reminds me of a squabble I had with a survey worker on the phone one night. She rang up to talk to me about a certain advertisement and whether I had seen it.
I replied that I did not have a television, and she attempted to end the call. I said “oh no you don’t”. And then explained to her why her survey would not be accurate if she failed to include people like me.
She really struggled, so I had to ask for her supervisor in the end. The supervisor was most miffed at my insistence, but had to concede the point. I made them then go through the survey with me (which only took two minutes). They mumbled something about having to include the data in their results and sloped off.
I would bet $10 my replies went straight into the nearest bin. If advertisers were to get even a notion of how many people their money does not reach, they would stop spending it on TV ads.
Any asset bubble, be it shares, property or tulips, is only able to inflate if investors are naïve enough to ignore fundamentals and believe spin.
So far, if property prices are any guide — the spinners are winning.
Fundamentals? What about the massive shortfall in housing in our capital cities and the rising population rate? I would have thought supply and demand was pretty ‘fundamental’.
Not to mention a lack of infrastructure being developed over the last generation, shortage of available land and finance for development drying up, but hey, don’t let the facts get in the way of a good story.
The real estate industry has a very strong mutually beneficial relationship with the newsprint media. They spend vast quantities of money on inserts, special sections and the like for both residential and commercial real estate every week (clients like this are getting harder and harder to find for newspapers). It is in the media’s interest to ensure one of their best clients is looked after as far as editorial content is concerned. There is a constant barrage of articles on just about every aspect of the market, talking it up and priming the consumer for higher prices and greater returns. The relationship between the industry and the media needs a tad more disclosure before any investor acts on the ‘advice’ given in the news rags.
Ditto to Mark J. You can’t expect the media to be impartial when they are generating tens of millions of revenue from advertising real estate. Imagine how much revenue ‘Melbourne Weekly’ brings into Fairfax. The real estate agents and their vendors pay serious money for these ads. These agents and their friends at REIV would get pretty upset if The Age kept running articles about the housing bubble. News media will always present the news in a way that will not upset their revenue streams. Or not even mention the news.
Adam, supply and demand is not a part of fundamental analysis theory. Fundamentals are things like earnings, costs, and cashflow.
Supply and demand also does not depend on the ratio of homes to warm bodies, and is not as stable as the word “fundamentals” would suggest. Supply and demand in the housing market is the ratio of properties currently on the market to buyers trying to buy them. That ratio is made of much smaller numbers so is unstable. It behaves steadily only because of constant effort to keep it so, by governments and, as Adam shows, by the industry.