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I was explaining to my mentoring group on Saturday that we must ignore the stats that come out about housing trends and values. I don’t mean to completely pretend they don’t exist but to realise they are generally, well…. wrong.

Wrong in terms of you would never want to make an investing decision based on them wrong.

For example QV today said values are 3.9% below the market peak of 2007 and that they have increased 6.1% over the last 12 months.

So taking those stats would lead us to believe that things are nearly back to normal and there has been some capital growth in the last 12 months.

Where as the reality is properties are not selling well at all and one can purchase property all round the country for 20, 30, even 40% below 2007 values.

One of the many issues that causes these errors is the impact of volume of sales.  And this is what I see skewing statistics currently to make them almost worthless.

For example lets say you normally sold 100 widgets a year and the prices ranged from $10 to $1000 but 95 of the 100 sales were all around the $100 mark

IF you turned this into an annual statistic the 5 low and high sales don’t have much impact on the median or average price which is $100.

But then there is a global widget market collapse so the “average” sales all plummet.  People looking for bargain widgets still pick up the really cheap sales and the uberwealthy investors don’t even notice the collapse and they still buy the top end widgets.

So lets say average sales go from 95 to 10 sales. Lets look at what happens.

If there are 2 x $1000 sales and 3 x $10 sales this moves the average sale price from it’s usual $100 to $202.  The average has DOUBLED because of a lack of mid market sales.

If there are 3 high end sales and only 2 bottom sales the average goes to $268.

So………..    we currently have a collapse of mid market housing sales.  Volume of sales has plummeted.  The top end is kind of OK and the real bottom end is moving quite well, although a lot of better quality properties are selling at bottom end prices.  So the absence of normal sales levels in mum and dad housing makes the average sales stats meaningless, just like the widget example.

In fact the analogy is prefect. It is highly likely that the upper end of the market staying reasonably normal is significantly skewing the averages higher.

And that’s why we must ignore current housing stats because they are wrong

Stay Inspired and Stay Safe ~ Dean Letfus

The Ethical Investor

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