STATISTICAL BOOM OR REALITY GLOOM

Oft attributed to Mark Twain is a phrase I love “There are three kinds of lies: lies, damned lies, and statistics.”

In real estate, especially at my age, I find the combination of knowledge (that is, study, training, listening to others) and experience is what really counts… and works!

Statistics are easily manipulated to portray any view you want.  I therefore implore you to either study the mathematics of statistics, a very dry and boring subject, or just ignore them completely.

Digression to another phrase that tickles my fancy… Age and treachery will beat youth and exuberance every time! Just thought I’d throw that in!

Anyway, to statistics first and then onto the market…

 

Median – you often hear this phrase used but most people have no idea what it means.

You sometimes hear folks misuse it when they refer to the strip of concrete down the middle of the road as the “MEDIUM STRIP” rather than a “MEDIAN STRIP”. Sorry, I just have to cringe and bite my knuckle when I hear people say “medium” in that context.

Back to median. It means the middle number in a sorted list of numbers. Mmmmm.

Relevance to real estate?

Say there are 21 recent sales in a suburb and you are looking for the median price, a price so often quoted as the GURU VALUE GUIDE!  I will leave off the last 3 zeros. You arrange the 21 sales in ascending order of value.

320, 340, 340, 360, 360, 380, 385, 390, 415, 475, 560, 599, 650, 725, 900, 945, 1,000, 1,050, 1,200, 1,200, 1,210.

This suburb has an area of houses that lie near an industrial estate and a major freeway and attract prices well under $400,000.00.  On the other side of the suburb is a hill with ocean views completely shielded from the freeway, industrial area etc and the estate in which these houses are situated has an imposing entry gate and 24 hour security.

Mmmm – the MEDIAN value for this suburb is just $560,000.00, yet nearly a quarter of the sales are over a million dollars!  The statistic is, for your personal research and guidance purposes, next to useless.

The average (or mean) price doesn’t help much either.  The average (or mean) price is all the prices added up and divided by the number of sales, in this case about $572,000.00. If you were researching this suburb from afar, it wouldn’t give you ANY IDEA of the true values in this suburb would it?

And another example of how MEDIAN means diddly-squat.  A local, well positioned but forgotten suburb had a median price of $400,000.00.  A developer moved in and paid a premium price for a lot of the old houses many of which sat on large blocks of land up to 1,500 m2.

The land was carved up and luxury houses built and sold for an average (or mean) price of $920,000.00.

The median price for this suburb, once those sales cleared onto government databases, shot up to over $650,000.00 in a market which, at the time, was stagnant.

The older houses were still only worth $400-450,000.00 but the new houses were nearly a million dollars.  Again, the median and mean figures, in and of themselves, aren’t much use.

Now that I’ve put you off using median and mean values in your research, I’ll move on to the market in general.

Hopefully it’s obvious I read a lot and speak to many, many people in the real estate, banking, finance, law and accounting fields, some on a daily basis.

As an ex military officer, there is nothing as valuable as current, detailed and reliable intelligence. Make sure you are in possession of real time market intelligence and not some rubbish written by someone with a hidden agenda.

The Australian real estate market is stuffed, ruined and poised for a major correction – down.

The main reason is affordability. I’ve just read where a figure of only 20-25% of gross income being applied to the “average” mortgage.  There’s that word again…average… What did I just say about “average”?

Talk to REAL PEOPLE. Look at real figures.  Say a wage or salary of $50,000.00 a year here in South East Queensland trying to support a $300,000.00 mortgage.  This combination is fairly common.

And quoting a percentage of gross salary or wage in nonsense as none of the payments you make to your home mortgage are tax deductible so they come out of your AFTER TAX money.

$50,000.00 or $961.00 a week gross.  The ATO wants about $150.00 a week, give or take, leaving you about $810.00 a week in your pocket.

Payments on a principal and interest $300,000.00, 25 year home loan are, at current rates, give or take depending on the Lender, a whopping $440.00 a week or $1,905.00 a month.  Ouch!

Now, to my mind, that’s nearly 55% of your take home wage.

Add rates and building insurance and that figure could easily rise to over $500.00 a week or more than 60% of your take home pay.

I’m assuming a $400,000.00 property (not many of those around really) and the people buying have saved a $100,000.00 deposit plus stamp duty and legal costs! (Lots of those around aren’t there?)

You cannot live on $461.00 a week if you have a family,  a car, credit card and other every-day bills.

The result?  Mortgage Stress.  The answer was to reduce interest rates… mmmm… that hasn’t worked has it?

The only way this is going to work is to have the market return to equilibrium (a state of poise or balance).  All things in nature, like water for example, seek a level where there is balance.  The road to balance has been driven so hard in the United States that it’s gone the other way and house prices are so depressed as to be now, in many areas, a multiple of less than 2.

“Multiple of 2?”

I hark back to the days my parents bought a house for $10,000.00.  My Dad earned $3,500.00 a year and supported a wife and three kids. The multiple was what you had to multiply his annual salary (gross) by to get $10,000.00.  It was then, about 2.85.

Most of the houses I have built over the years prior to 2001, have ended up with multiples of between 3.2 and 4.0 depending on how big they were, the size of the land and whether there were luxury fittings inside and out.

Now to the boom of 2002 and beyond… I was very active in the residential market for 5 years 2002 to 2006. I sold hundreds of homes.  Registered Valuers couldn’t keep up with rising values and would constantly call to ask my opinion as I had the most For Sale signs in a particular suburb at any one time.

In the end, in the value range I was dealing, I said “just add $8,000.00 A MONTH!”  It turned out to be very true.  Sale prices rising at $8,000.00 a month resulted in a feeding frenzy as fear and greed took over.

In 2012, major Banks are building up large cash reserves and making allowances for the disaster about to unfold.  The Banks KNOW the property market is over-cooked and they KNOW a major correction is in the wind but they won’t tell you, or me!

The multiples here in South East Queensland are now 8 to 9 to 12 or more in some suburbs. It’s ridiculous and cannot be sustained.

It must correct and only the timing is yet to be revealed.

I have hundreds of concrete examples. Famous Hedges Avenue, Mermaid Beach, Millionaires Row, has been savaged and is now referred to as “Half Price Hedges”.

I pulled a flyer from my letterbox a week ago.  Large, modern waterfront property bought for $1.5 million in 2003, now asking just over $970,000.00.  I’ve seen some recent sales of similar properties in the area and the seller will be LUCKY to get an offer over $800,000.00.

OUCH!

And we have people ramming down our throats that prices have only dropped 5% or 10%.  RUBBISH!

People are hurting and prices are tumbling.

Forget what you read in the Press.  Go and check it out for yourself. It’s happening NOW.

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2 thoughts on “STATISTICAL BOOM OR REALITY GLOOM

  1. Makes so much sense … thank you for sharing your knowledge with us!

  2. There are those out there (Economists especially) who say that a full 100 point (read 1% – speak English will you?) interest rate drop leading into 2013 will cause a 15% spike in house prices. Huh? What ARE they smoking? In my example, a 1% drop would mean $40.00 a week off the mortgage payment. It’s cold comfort to those who would, if these people are right, face a price jump from $400,000.00 to $460,000.00. Increase the mortgage from $300,000.00 to $360,000.00 at a one percent reduction to say 4.8% over 25 years and the repayments JUMP to $475.00 a week, making properties even MORE UN-affordable!

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