The main difference between property and shares lies in the depth and reliability of historical data. The share market offers extensive and dependable data, making it a valuable resource for financial decision-making.
In contrast, property data often lacks the same level of reliability due to various factors, which I discuss below. Therefore, when making decisions related to property, it’s important to combine data analysis with local geographical expertise.
Data variations between publishers
The main publishers of property data include ABS, CoreLogic, Domain, SQM Research and the Real Estate Institute of Australia including its state-based organisations. They all use different methodologies to try to measure the same thing – the percentage change in property prices over time.
Terry Rider cites many situations where reported property price changes have varied significantly. For example, in 2016 the ABS reported a 3.3% change, SQM a 7.5% change, Domain a 10.7% change and CoreLogic a 16.7% change! 3.3% to 16.7% is a big range!
CoreLogic uses the hedonic home values index which uses regression analysis and property attributes to value all properties. SQM uses asking prices. Domain uses settlement data and a statistical model to adjust for the types of property sold during the period. ABS uses data from the title office and data reported by real estate agents. The REIA uses data provided by real estate agents and conducts periodical audits and data matching to ensure the data is accurate.
I have always used the REIA’s data.
Suburb data can have even less application
I find that median data for capital cities is statistically reliable because it includes hundreds, if not thousands, of data points. This information provides a general indication of a capital city market’s health.
In contrast, suburb-level data can be less reliable when it comes to making investment decisions for several reasons.
Thinly traded markets or smaller suburbs may lack sufficient data points to accurately calculate a median value. It’s important to note that individual sales do not always reflect the true intrinsic value of a property, as I’ll explain below.
Of course, there can be significant variations in the investment quality of individual properties within a suburb. For instance, there might be only a small area with a few streets that are considered investment-grade. In such cases, the suburb’s overall growth data might not accurately capture its true investment potential.
With stock market data, we can filter by factors like stock quality – things like leverage, profitability, and cash flow – as well as a company’s size and liquidity. This helps us exclude data that is not relevant to investment decision-making. However, when it comes to property data, all sales data are treated equally. The sale of a high-quality investment property carries the same weight as a subpar property.
It would be helpful if a property data provider could construct an ‘investment-grade property index’. This index could exclude transactions that have certain attributes which suggest a property may not be investment grade like being located on a busy main road or next to a commercial building.
Take care with individual property sales data
I use capital city data to analyse broader market trends. However, when making specific investment decisions, I focus on the data for individual properties. For example, if I’m looking at 14 Smith Street, I’ll investigate the historic growth of comparable properties on Smith Street and nearby areas to create a dataset of past growth. However, not all sales data reflects the property’s true intrinsic value, and I’ll explain some reasons why that might be.
Sales are impacted by the effectiveness of the campaign
I’ve previously explained that who you choose to sell your property – the agent – and how well they market and manage the sales campaign can have a big impact on the final result.
On the flip side, if a lazy agent poorly markets the property, it’s likely to sell for less than it’s worth.
Most people will be unable to identify if a sales campaign negatively affected the outcome. That’s why having knowledge of the local area is critical. An experienced buyer’s agent will pick up on these things.
Motivated purchaser or vendor
An owner who is under financial pressure to sell their property may be willing to accept a lower price to secure a quick sale.
On the flip side, a purchaser who perceives special value in a property, like being a neighbouring property owner, may be inclined to pay more than intrinsic value to successfully buy the property.
I recall a property sale in Melbourne a couple of years ago. We were surprised by how much it sold for, until we learnt that the purchaser was a very wealthy neighbour, which explained the unusually high price.
Two-thirds of property buyers are owner-occupiers
Market value is generally defined as the price a willing and knowledgeable buyer would pay to a willing and knowledgeable seller, both acting under no undue pressure.
In the stock market, we can typically assume that a transaction reflects market value, as typically the predominant goal for every transaction is to make a financial gain. The price discovery mechanism in a listed market plays a crucial role in this process.
However, when it comes to property buyers, especially owner-occupiers, financial gain isn’t always the primary motivation. Lifestyle and emotional factors significantly influence their decision-making, which can affect the prices buyers and sellers are willing to accept.
Neglecting this important distinction is why I believe many economists struggle to accurately forecast property price movements.
How much of the growth is driven by capital improvements
When evaluating the historical capital growth rate of a property, it’s crucial to account for any capital improvements made, such as a full renovation or extension. These improvements will undoubtedly increase the property’s value, but as investors, our primary interest is in how the value of the underlying land has changed over time.
Determining the exact cost of these improvements and when they were made can be challenging. I often find it helpful to look at past photos of the property, which are typically available from past sale listings. Some property data platforms also track when the local council approves developments, allowing for better estimates of improvement costs and time. While there’s a degree of subjectivity in these calculations, failing to adjust for improvements can lead to less reliable information.
You can use this Excel formula to calculate the capital growth rate adjusting for improvements – click here.
Other statistical data can be useful
Sometimes, property advisors use demographic data to support their investment thesis on why a specific location might yield attractive future investment returns.
Firstly, it’s crucial to distinguish between leading and lagging indicators. Lagging data reflects past performance and confirms existing trends while leading data consists of metrics that can forecast future trends. However, real-time data related to property and demographics is very limited, which means there isn’t much leading data to guide investment decisions.
Secondly, any positive demographic characteristics should correlate with past capital growth. I believe the best way to identify a worthwhile investment location is to look for areas with strong historical evidence of solid capital growth rates over many decades. Invest where there’s a proven track record of success.
Property selection requires experience
Relying solely on data to make important investment decisions is risky because that data may be unreliable, leading you to incorrect conclusions.
Data can only take you halfway; you also need experience and local knowledge to interpret any data accurately and determine which data points are trustworthy and which should be discounted.
In this sense, property investment is part art and part science – both aspects are equally crucial.
