Demystifying property data

Over the past two decades, property data has reached unprecedented levels.

Of course, property investment experts have always used data to help them identify investment-grade properties in locations primed for superior capital growth.

These days, though, the abundance of data online makes it seem “easy” for anyone to do the same.

The problem with this type of thinking is that statistics can tell you anything you want, especially if you have underlying biases to purchase a particular type of dwelling or in a specific location.

That’s why it’s vital to dig deeper and consider a number of different metrics before investing anywhere.

Let’s take a look at four of the most common types of property data to illustrate what I mean.

1. Median prices

In the simplest sense, the median house price is the middle point of all sales ranked from high to low.

While one would think there can only be one true median price as it is a strict mathematical definition, medians may differ between data providers depending on the data they collect, the data they actually use, the accuracy or complexity of the index methodology they rely on and the time frame they use (monthly, quarterly or yearly.)

Often considered the “Holy Grail” of property data by many people, median dwelling prices aren’t really a good indicator of what prices are doing over the short term.

And if investors want to work out true capital growth rates, they should not use median price data, since they vary because of a number of factors, but should use more sophisticated index methods that overcome the median price biases.

You see, median prices tend to fluctuate up and down every quarter, depending on the types of dwellings that were bought in that period.

For example, if there is an influx of first-home buyers into a suburb who are buying at the lower end of the price scale, then the median price will be dragged lower.

Likewise, if a bunch of upgraders purchase and renovate their properties, the median will correspondingly go up.

Over a year, median price statistics tend to be less volatile but, even then, if someone decides to buy in a location because its median price has increased over the past year or two, they have already missed the capital growth boat.

So investors should use medians to understand how the macro market is performing but understand that it gives no real information about individual properties and this requires more research and analysis.

2. Supply and demand

There are a number of metrics that show the supply and demand equation in particular locations, including auction clearance rates as well as days on the market and building approvals.

Simple economics means that if there is more supply of, say, new units than demand, then prices will fall.

If there is more demand than supply, say, indicated by high auction clearance rates and low days on market, then prices will increase.

One surefire way to gauge buyer activity in an area is to take a look at trends in the number of monthly sales.

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If a suburb sees increasing sales on a month-to-month basis, as is happening in our big 3 capital cities at the moment, then that’s a pretty clear indicator that buyers are moving in.

The next step is to compare this with the area’s overall number of listings of properties for sale.

If sales are trending up yet the number of listings is trending down, prices are going to rise in the future.

On the other hand, if listings go up (such as an oversupply of new apartment complexes) and sales go down from month to month in a certain suburb, then capital growth is likely to flounder.

3. Days on Market

This dataset is calculated by the average number of days that properties within a particular category (apartments, houses, villa units etc) are advertised for sale and I’ve found the trend of DOM is a key indicator of whether we’re in a buyer’s or seller’s market as it is a serves as a marker of the relationship between supply and demand.

If it’s taking longer for properties to sell, it’s usually a sign of softer market conditions and vice versa.

Again, this is a useful metric, but it’s not the bees’ knees of successful property investment.

4. Vendor discounting

When there are fewer buyers out looking for property than there are properties for sale ( a buyer's market) vendors usually need to discount their asking prices to secure a buyer.

But currently, as many of our property markets around Australia are picking up steam with plenty of buyer interest, vendors are tending to need to discount their asking prices less.

5. Market Depth

I like buying in areas where there is significant market depth - where there are a large number of property transactions and where there are large numbers of buyers and sellers.

This creates liquidity in a market and that's why I'd avoid regional towns and even our smaller capital cities.

For example, there are about as many properties sold across Melbourne each month as there are in Hobart in a whole year.

6. Rental yield

Put simply, rental yields reflect the average rental return for investment properties in specific suburbs.

Now, as I’ve often said, no one has ever got rich on cash flow, but you do need it to manage mortgage repayments and property expenses.

If a rental yield starts rising that’s a sign that there is strong demand from tenants to live in those locations.

As the yields increase, more investors are attracted to those locations and, unsurprisingly, property prices then start to rise with the additional demand and this drops rental yields

Rental yields are important to keep in mind, but should never be used as the sole indicator of an area’s investment worthiness.

In general look at the trends and not the specific figures in isolation.

The smartest investors always keep an eye on a variety of market metrics – and work with experts who have access to many more and who have the perspective to interpret them correctly.