Podcast: How NZ's Median House Price Can Increase, Even If House Prices Go Down Everywhere | Ep. 257

Posted by Ed McKnight on 26/05/20
How N Zs Median House Price Can Increase Even If House Prices Go Down Everywhere 001
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Show Notes

What's Covered in the Show?

In this episode, we discuss how the NZ median house price can increase, even if house prices across the country decrease. This seeming anomaly is based on how the median house price is calculated. This measure of average does not track differences in the distribution of houses sold across the country.

If a higher proportion of Auckland houses are sold within a given month the median house price will increase, even if fundamental house prices do not increase over the same period.

This makes the median house price a poor measure of how the property market is actually performing month to month.

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Transcript of the Podcast

Ed McKnight: Hello and welcome along to the Property Academy podcast. I'm your host Ed McKnight, and I'm Andrew Nicol, and today on the show we're talking about the median house price in New Zealand and whether it actually tracks the amount of wealth you have in your property.

So this is really interesting because as I was scrolling through Facebook the other day, I saw a post comparing the median New Zealand house price in I think it was March, 2020 and then again an April, 2020 now that over that time, the median house price in New Zealand did increase by $15,000.

It went from, I think it was 665 K to 680 K, and the comment was, who's feeling 15 K richer? Now, of course I had to pipe up a little bit as I'm known to do and say, hey, the median New Zealand house price is not a good measure of what anybody's house is actually worth.

And actually it got me thinking, and we'll get into this a little bit later, but every region in New Zealand could actually decrease in value. The median house value in every region could decrease, but the median house price in New Zealand could actually increase, and I'll walk you through some numbers to show that.

But the real reason that the median New Zealand house price increased between March, 2020 and April, 2020 was not necessarily due to the underlying value of properties increasing, but just that a higher proportion of Auckland based properties were sold relative to last month.

Andrew Nicol: More valuable properties.

Ed McKnight: That's right. So it's just that more valuable properties happened to be sold, which are in Auckland and Wellington rather than some of the regions.

Of course, volumes decreased everywhere, but you've got to look at the makeup of the properties that were actually sold. So if we just look at the volume year on year of property sold between April, 2020 April, 2019 remember, obviously April figures were way down.

Across everywhere except Auckland, property volume sold decreased by 82%, Auckland only 69% so there's about 13 percentage points difference between them. So a higher proportion of properties were sold in Auckland, which drags up the median house price.

It's not necessarily that house values went up everywhere. Now I just want to walk through this kind of the very simplified example to back up the comment I made before that house values could actually decrease everywhere, but the median New Zealand house price could actually go up.

Andrew Nicol: I, to be fair, didn't believe Ed until he actually showed me the spreadsheet on this one. So I didn't understand how that could work either. So we had to roll out the real nerd.

Ed McKnight: Yeah. And it's a very stylised example, if I can use that term. Very, very simplified, but I just want to get this point across because I feel very, very passionately that you need to dig deeper than the median New Zealand house price as a gauge of where the property market's going.

So in my fictionalised example, we only have three cities in New Zealand, Auckland, Christchurch, and Wellington, and perhaps I should have made one of those Hawera where I'm originally from, and I've seen it look in these three cities, there are only 12 properties sold. We're going to keep it really simple.

There are only 12 properties sold within New Zealand four in Auckland four in Christchurch, four in Wellington.

All the Auckland properties sell for a million dollars. The Christchurch for half a million dollars and Wellington for 800 K.

So if you look at that, the median house price in New Zealand is 800 K so the median house price is essentially Wellington's house price.

Let's move a year on, and every region is cut by 10%, house values dropped by 10%. So Auckland's now are worth 900 K down from a million, Christchurch, 450 down from 500, Wellington, 720 down from 800 so everywhere house prices have dropped.

But what's changed is that instead of the properties being evenly split four ain Auckland four in Wellington four in Christchurch, now it's six in Auckland, three in Christchurch, three in Wellington. So prices have dropped everywhere, but the makeup of the properties, the volumes of properties in different regions has changed.

So now that half are at 900 K three are at 450 and three are at 720 the median house price in New Zealand is now 810 K so the median house price went up by $10,000 but everywhere Auckland, Christchurch, Wellington house prices dropped by 10% now again, very, very stylised example.

Would this necessarily happen in practice? Not necessarily. We've made the numbers work to show you that it would be possible, but I do just want to get across, and this comes after my tirade about data abuse a few episodes ago, you do need to dig further than the median house price.

You can't say, okay, house prices have gone up by 15 K or the median house price has gone up by 15 K so we're all 15 K better off.

No, we're not. It's not any sort of metric even about the average house buyer because it is affected by the distribution of how many properties happen to be sold in Auckland on one month versus Wellington and Christchurch.

And of course, all of these regions have differing house values. So if more expensive houses are sold in a particular month, then that's going to drag up the median.

If a larger proportion of lower priced homes say in Southland were sold, even if they were selling at really good prices that would actually drag down the median.

So it's not a good gauge of whether prices, house prices, or house values are appreciating or depreciating over time. It's much better in this case, to use core logic data, which is what we actually track in most of our maps and stats on Opes because the median house price, which the Real Estate Institute of New Zealand releases is based only on what has sold over the last month.

Whereas the core logic data is based on their median house value of every property in New Zealand. Now, Andrew, I see you've got some notes there. What are you picking up from this conversation?

Andrew Nicol: So I think that the quote that came to mind is that there are three types of lies, lies, damn lies and statistics.

And I think, nine out of 10 statistics are made up on the spot.

Ed McKnight: I thought it was 11 out 10.

Andrew Nicol: 11 out of 10. And so I, it's interesting because you do see a lot of developers particularly, cause they don't know how to read the numbers post comments like this about the median house prices. And this was a particular developer that Ed likes to correct when he misuses data...

Ed McKnight: It's data abuse Andrew.

Andrew Nicol: Data abuse. So you do just have to be really, really careful to delve into the detail on it, because the devil is in the detail, you've got to get it right when you're looking at these numbers.

And I think we're going to see a bit of this in the coming months as more numbers come out, following Covid 19 lockdown and a slow down in the market in terms of number of sales. And so it can be really easy, this example was to show you, it can be really easy to skew those numbers to give an unfair advantage on property prices going up when they're not.

Or maybe go the other way as well. Because remember also the other thing that has to happen is people have to accept and crystallise their loss and sell at a loss for these numbers to go down. So it could well be that Queenstown, for example, where I was talking to one of my clients there that's very involved in the property market this afternoon.

She was saying that, you know, rents have definitely dropped in her particular case, about 28%. Yeah. 30%, I think was the other day what we said that Tony Alexander had commented in his survey that the numbers were looking like, so bang on, and that prices, you know, we're seeing a bit of a hit for people that were selling under desperate situations because, you know, they're moving back overseas, et cetera.

But if a lot of people who notice a drop in the market, just stay the course and hold onto those properties, and then, you know, you have a record month in Christchurch, a record month in Auckland. You might see those numbers increase even though some places are going down or you might see the opposite, you might see some numbers decrease because people are selling in desperation and need to get out of the market quickly.

And whilst other property markets are going up, you might see a drop in those numbers. So again, you just have to delve more into the detail if you want to get accurate with it. And I guess if you're buying for the long term, it doesn't actually matter. Doesn't matter that much.

Ed McKnight: Certainly month to month, and I think this is over the last couple of weeks as we've been doing our webinars and recording podcasts, one word keeps coming back or I keep harping on about it, which is distribution, which is how many properties are sold in different areas, because the average is just that it's the average and the average number is not representative, actually representative of all the numbers, obviously within a sequence. So it is important to dig further.

And I just thought it was really interesting to point out this anomaly that actually the way we measure data and report on the median house price, house values could drop everywhere, but the median value could still increase, which I just think is, is really, really fascinating.

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Thanks for listening to the Property Academy podcast. I'm your host Ed McKnight , and I'm Andrew Nicol, and we're going to be back again tomorrow with even more daily strategies, tactics, and insights to help you get the most out of the New Zealand property market.

Until next time.