Understanding differences in property statistics & identifying data bias
Property market data can be an incredibly useful tool in helping investors understand the movements of different real estate markets, and (when applied correctly) in identifying areas that are performing well or, more importantly, likely to perform well in future.
However, as useful as data can be for buyers in tracking a market’s progress, reading and understanding what it means in practice is not as straightforward as it seems. Add to this the fact that different research outlets will often present conflicting figures, and it’s easy to see why so many buyers go wrong when reading property statistics.
To understand how to use data more effectively, below we’ve looked at two common methods of measuring movements in property prices, the potential bias present in each, and how to get more accurate insights from property statistics to make better informed buying decisions.
Hedonic Price Index
Used by some prominent research outlets, the Hedonic Price Index is a judgement of a market’s price movements that involves revaluing all properties in a geographically defined market, not just those that have sold. This method relies on attributing a value to the various components of each property and indexing the components (land, bedrooms etc.) of established properties against the data of recent properties that have sold.
Benefits of this method:
By considering the whole property market and not just the specific properties that have been sold, the Hedonic Index claims to remove artificial price growth, which is influenced by factors like new apartments pulling up the median price. In addition, because this Index is re-calculated daily, this data is quick to release compared to other methods.
Potential drawbacks & bias:
Hard to analyse – With assumptions already built-in to this method (for instance, it doesn’t take into account renovations), price movements in the Hedonic Index can be harder to analyse, where more simplified data collection methods allow for more transparent analysis by the reader, and hence a clearer understanding of the reasoning behind price movements. The hedonic method is also very dependent on the value placed on the “components” of a property. However, this may not reflect local market factors, such as if there is an additional premium placed on specific factors (a fourth bedroom or a specific school zone) in some locations compared to others.
Doesn’t take into account the influence of density – The density, or zoning, of an area can have an important impact on a property’s development potential, and hence the value assigned to it. The Hedonic Index takes a broader look at this factor by assessing the density of the surrounding “mesh block” area. However, in doing so, this doesn’t take into account the increasing tendency of local councils to have a variety of zonings within a suburb (e.g. sometimes zonings will differ for corner block sites). In addition, this method also doesn’t allow for the varying effects of density and how it is perceived by buyers in different areas. For instance, higher potential density is more popular in some locations than others, which will naturally influence the extent to which this impacts sales prices.
Median house price
Generally the more simplified method of data collection, the median house price assesses the “middle price” of all property sales in a given time period.
Benefits of this method:
The big advantage of median house price over other data collection methods is its transparency. There are no assumptions made in calculating this statistic, hence it’s easier to cross-compare with other data sources and market trends to draw your own conclusions on what’s happening in the market. Providing you know how to read and apply median house price in the context of other market factors, this makes it more straightforward to identify potential bias.
Potential drawbacks & bias:
Can be skewed by different price segments –An important factor to be aware of with median house price is that it can be influenced by the composition of sales. This means that the price will be influenced upwards if there is more activity in premium price points, or downwards if there is more activity in the lower price bracket, such as if a market is recording high levels of first-home buyer activity. This method can also be problematic when based off a particularly small sample size – for instance, if only three properties have sold in a given area, this may not be a large enough sample to provide an accurate representation of the broader performance of that suburb. However, because this statistic is transparent, and the quantity of sales by suburb and price range is published, this bias is easy to identify. Not only this, but as a buyer or seller it can be helpful to know which sectors are more active than others – information which can be less visible in the Hedonic Index.
The influence of new construction – An influx in newly constructed properties can also drive changes in median house price. For instance, a new apartment complex in an area comprising mainly old apartments could cause a short-term spike in the median unit price that doesn’t represent an adjustment of all units in the area. However, because this is easily visible through sales and building approval data, this bias is also straightforward to identify. While an influx in median house price in areas where older houses are demolished and rebuilt doesn’t mean that all houses have “grown” in value, it does reflect that buyers and owners place a higher value on an area by increasing their investment there. This in itself can also lead to gentrification over time, supporting the steady growth of property values in the area.
Reading property market data: why context is vital
While property price data is an invaluable resource for buyers in determining the broader performance of a market or suburb, it is also better understood in the context of other market factors, especially when making decisions regarding the worth or potential of individual segments or properties.
At Momentum Wealth, our property acquisitions team take into account over 40 individual factors, both data-driven and on-the-ground, when identifying investment-grade properties on behalf of our clients.
If you would like to find out more about how our buying methodology could assist you in your property search, visit the Momentum Wealth website to contact our team. Alternatively, check out the following blog for more tips on how to better leverage property data to make more informed purchase decisions.