How can the median price be rising when property sale prices aren't rising?

This is not a conundrum: it is in my opinion the reality of the situation in today’s market and has led to these fairly striking statement by some leading economists:

Westpac's Chief Economist Dominick Stephens said “It is impossible to tell what is really going on with house prices.”

New Zealand Institute of Economic Research (NZIER) principal economist Shamubeel Eaqub said “trying to forecast house prices has been a mug's game.”

The reason for these statements is the conflicting data coming out from REINZ and from QV – specifically the March median price data, which showed an accelerating rise in price from 8.2% year-on-year growth in February to 9.2% in March set against a fall in sales of 10% and QV reporting that the rate of price increase was easing. In a single month REINZ reported the median price of New Zealand property had risen from $415,000 to $440,000!

There has even been questions as to the accuracy of the REINZ data. This is not something I believe, or have any insight into, but such comments certainly demonstrate the concern in the market as so much value is attached to the timely and accurate indicators of the property market by so many sectors of the economy.

I have long advocated the use of the REINZ Stratified Median price index as a more accurate methodology for tracking the true indicator of the price of property sales across the country. However, even this measure, long trusted for its lack of volatility has of late shown some wild fluctuations. 

Tracking these fluctuations over the past 20 years as the chart below highlights shows that on a three-month moving average basis the recent decade has shown a normal fluctuation range of $3900 from month to month. This was a higher level of volatility when compared to the 1990s when the volatility was less than $1700 month to month.

In the past three months this volatility has spiked, with the three months average for the 2014 year so far showing a volatility month-to-month exceeding $11,000 – a highly volatile situation.

So why is it that we are seeing this volatility?

In my opinion the iLVR restrictions are having a greater impact on the property market than is currently being acknowledged.

Let's look at the facts:

• sales of lower priced properties are down – the data is reported by both REINZ and in the Auckland market by Barfoot & Thompson. 
• overall property sales have already come off their peak and are easing – 10% down in the year to March.
• the retail banks have demonstrated an ‘over-correction’ to the Reserve Bank-imposed 10% criteria for high LVR lending, resulting in upwards of a 90% fall in the approval of 80+% LVR mortgages.

To better assist in understanding how these indicators might be contributing to the volatility in the median price I have developed a hypothetical scenario of the composition of the property market sales in a month. Then I compared this with a subsequent month where the underlying property prices remain the same year-on-year across all price sectors, where sales volumes remain unchanged across all price sectors, with the exception of the lower priced end of the market and let me show the impact.

Here is a hypothetical normal distribution of property sales in say March 2013 – 5082 sales with a median price of $400,000 and for reference an average price of $507,000

Now let’s jump forward to March 2014 - let's reduce by 23% the sales volumes in the price ranges $225,000 to $400,000 - just these price ranges. All other sales volumes by price range remain identical to the year earlier.

The outcome of this impact (the hypothetical impact of the LVR restriction) is shown in the chart by the marginal sales reduction in red across those price ranges.

That 23% fall in sales across those lower priced properties segment leads to an overall 10% fall in total sales to 4,567. The median price, though, went up by 8% to $431,000 and the average price went up by just 4% to $528,000.

This model is designed to demonstrate that what we could be experiencing is two components of the property market working in complete isolation.

The majority of the property market is plodding on unaffected, with no change in year-on-year sales volumes and not experiencing any price appreciation. In those sectors directly affected by the LVR restriction the sales volumes have dropped by 23% but equally with no price change amongst those sales. The net effect, though, is that the signal being sent out to the market through the median sales price is that property prices overall are rising in an inflationary manner.

A classic situation where aggregated statistics belies the true situation.  

Former Realestate.co.nz CEO Alistair Helm is founder of Properazzi.