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The latest happenings in the Melbourne property market. For our Essays and The Secret Agent Report, see our Research page.


Category Archives For: Numbers and Stats

Why You Can’t Trust Averages

Changes in average prices are frequently used by commentators to draw conclusions about the property market. Our recent post on Fitzroy’s true capital growth gave some insight into why statistics like averages and medians are not sufficient to make judgements on property value in a given suburb.

To find true growth in value, many factors including property size, location and renovation levels need to be accounted for. This can be done by observing resales of the same property over time, given no structural changes have occurred between sales. When we compare the annual average price changes (reported) and our own index based on resales only, we start to see that capital gains are mostly exaggerated using averages alone.

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The Secret Agent Report – The Yield Curve

We have just released our latest Secret Agent report!

When deciding to invest in the property market, most of us will first obtain approval for a loan, find a suitable property to buy and then pay off the mortgage accordingly, dealing with any rate rises as they come. It can be that simple. A more clever way to invest would be to consider how mortgage rates are likely to change in the near future, prior to making the decision to purchase. This is where the yield curve plays an important part in making general predictions about future mortgage rates.

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The Yield Curve Report


Fitzroy’s True Growth

Between January 2011 and December 2015, 512 houses and townhouses were bought and sold in Fitzroy. If we compare the average prices in 2011 and 2015, these have increased by about 9.4% per year. That’s the only thing this tells us: people spent more money on each house in 2015 than they did in 2011.

Table1


As a statistic, averages can be very misleading. They ignore any changes to the mix of properties being put on the market. For example, each time a property is refurbished, extended or renovated, the value of the property increases. While this increase in value is reflected in an increased average price, this is not true capital growth, as additional investments had to be made. Also, with only about 100 properties being sold each year, the sale of a very few, very large houses would have a significant impact on the average price in that period.

If we break this down into individual years, we can see that average prices fluctuate, which again shows us the limitation of using averages as indicators of capital growth.

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Yield Curve and RBA Cash Rate

Bond yields provide a reliable way to make predictions about monetary policy. This week’s bulletin explores why this is the case.

What is a yield curve?

A yield curve is made by plotting the interest rates of bonds against their maturity dates. A normal yield curve occurs when long-term rates are higher than short-term rates. This is important for an economy’s liquidity, as banks can make a profit by borrowing at the (lower) short-term rates and lending at (higher) long-term rates.

What is a cash rate?

When banks borrow funds from each other in the overnight market, they can charge a special interest rate set by the Reserve Bank of Australia. This is known as the cash rate.

Let’s look at the current yield curve on Australian Treasury bonds with maturities between 90 days and 10 years (above). Parts of the yield curve are inverted (pointing downwards), meaning short-term rates (90 days) are higher than some long-term rates (2, 3 and 5 years). This creates a disincentive for banks to lend and if the entire curve is inverted, it can lead to a “credit crunch”. This happened in the US during the global financial crisis, when money suddenly dried up because banks could no longer profit from lending out money.

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Predicting Mortgage Rates

Historically, treasury bonds have been considered one of the most secure investments that can be made – especially in a country with a stable government such as Australia. The bond holder is almost guaranteed to receive half-yearly coupon payments plus all their principal once the maturity date is reached. Treasury bonds can therefore be considered a risk-free asset and the yield received is the risk-free rate for investment. For a bank giving out a home loan, the interest rate charged usually depends on the risk-free rate plus the risk premium, determined by the likelihood of the borrower to repay his loan.

We’d expect the average mortgage rate and treasury bond yield to behave similarly – that is, when bond yields increase, so should the mortgage rate, and vice versa. When we looked at the average variable mortgage rate and 10 year treasury bond yields in Australia, both move up and down in the same direction, although not always at the same time.

However, when you compare current variable mortgage rates with 10-year treasury bond yields from 8 months ago, we see that a strong relationship exists (see Fig.1). What this means is that we can now estimate the mortgage rate 8 months from now (September 2016).

Fig1

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A Matter of Price and Size

Is a more expensive house also a larger house? Usually yes, but does a 10% bigger property also cost 10% more? The answer, interestingly enough, is that it depends on the area.

The size of a property and the price do not always move up or down proportionately, but by different amounts depending on the suburb.

Travancore, Northcote and, surprisingly, Hawthorn offer the best value for money in the inner suburbs, while Albert Park, Middle Park and, unsurprisingly, East Melbourne, landed on the other end of the value spectrum.

To figure out what is a good deal on a house in any suburb, look at the percentage that price is greater or smaller than the average price, then compare this to how much bigger or smaller the land area is over the average. Finally, consider additional factors, including build quality, location and surroundings.

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The Secret Agent Report – EOFY Review

We have just released a special mid-month Secret Agent report! In this release, we take an in-depth look at the property market over the last financial year.

Start reading this report by clicking on the link below:

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EOFY Review 2014/15

 


The Secret Agent Report – Rent

Land monopoly is not only monopoly, but it is by far the greatest of monopolies; it is a perpetual monopoly, and it is the mother of all other forms of monopoly.”
– Winston Churchill 

In this latest report we look at the state of rents. This is a key issue for investors within the market. The changing cost of money has changed expectations around yield, while newly built supply has created greater choice for tenants. This is an important read for anyone looking to undertake an investment decision, or a potential home buyer looking to establish whether they should buy or rent.

We look forward to March’s report and getting the early indicators of 2015 to you in The Secret Agent Report. It’s one of the most interesting times in the property market in years.
 
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The Rent Report

Excerpt:

At Secret Agent we speak a lot about buying property, what to look for and how much value a certain characteristic might add. In light of a fresh new year, The Secret Agent Report considers property from a rental perspective. With more investors in the buying sphere than ever before, there has been an influx of available rental properties in the market, especially in the inner city and CBD itself. This has been compounded by the growing number of new apartment completions from 2012 to 2014 and continuing into 2015.

As uncovered by Secret Agent’s last report, sale prices of apartments have remained stagnant in many inner city suburbs over the past year. This, coupled with record low interest rates make attractive conditions for buyers to strike. However, investor sentiment of late seems to reflect concern about rental yields.

The number of people choosing to rent has increased over the past few years. With property expensive to buy, many first home buyers are being forced to continue renting for longer periods than they would have in previous generations. People are relocating for work more than ever and may prefer the flexibility of renting. Furthermore, there is a continuous influx of foreign students coming to Melbourne to study each year, as well as increased immigration levels. There are plenty of people wanting to rent. The question is: can demand still keep up with newly built supply?

A few years ago there would be crowds lining up for an open for inspection, most people holding their applications in hand already prepared to submit on the spot. Competition was tough.

Now tenants have a lot more choice and with choice they can be more selective. Open houses are less frequently attended and applications come in days later.

There are of course exceptions for properties in well located areas, especially quality houses. The reduced competition seems to have put rental prices on hold. If owners choose to increase the rent, they risk having their property vacant for long periods. This has resulted in many tenants not experiencing a major increase in their weekly rent over the past 12 months.

This report will take an analytical look at the rental situation in Melbourne’s inner city suburbs. In particular we look at the annual growth in rents, the turnover of apartments leased out and annual rental yields within each inner city region. All one and two bedroom apartments were included in the calculation of median prices if their weekly or monthly rents were advertised. Fully furnished apartments for short term leases were excluded from the study. To adjust for seasonality in the rental market, the report focuses on sales in the fourth quarter (October, November and December) of 2012, 2013 and 2014. It should be noted that the results listed are gross yields due to the variable nature of outgoings for each property. To obtain a net figure, one can extract 20% from the median rents. Also stamp duty is not taken into account in this analysis.

Due to the large numbers of student accommodation apartments in suburbs such as Carlton, Brunswick East and Collingwood, the results may be skewed in these areas.


The Secret Agent Report – Property Seasonality

“To be interested in the changing seasons is a happier state of mind than to be hopelessly in love with spring”
-George Santayana

With the winter period finally coming to an end things are starting to look a lot brighter. The days are longer, the clouds are clearing and the real estate market is coming out of hibernation. It is well known that there is a seasonal cycle in the housing market. Sale volumes are higher in the warmer months and lower in the cooler months. This is a worldwide phenomenon. In this months edition of The Secret Agent Report we look at the data to test the theory.

Our cover image this month has been created by freelance illustrator and graphic designer Dan Vaughan. Dan pays respect to the four seasons by presenting fruits that come into season at the start of each of them. With a tip of his hat toward Eric Carle’s classic The Very Hungry Caterpillar, Dan’s energetic style presents the movement and change of the seasons.

George Santayana was a Spanish Born naturalist, philosopher, poet and essayist, and we identify with his viewpoint above when applied to the property market. Spring is know as an exciting time for the industry, but it’s not to say we should ignore the fruits of the other seasons.

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The Secret Agent Report

Excerpt:

With the winter period finally coming to an end things are starting to look a lot brighter. The days are longer, the clouds are clearing and the real estate market is coming out of hibernation. It is well known that there is a seasonal cycle in the housing market. Sale volumes are higher in the warmer months and lower in the cooler months. This is a worldwide phenomenon. In both the USA and the UK, the housing market experiences above trend results for both prices and transactions in the two warmest quarters of the year. According to one study, in the UK, the difference in annual growth rates for house prices between hot and cold seasons was 6.5%. (Tenreyro, 2009)

Secret Agent decided to investigate this cycle to quantify how much seasonality influences house prices in the inner city property market of Melbourne. In the first part of this report, we analysed the results of house and townhouse sales for the last ten years in the inner city suburbs of Melbourne. All two and three bedroom townhouses and houses were included in the study if they were sold between January 2004 and August 2014 and if information about the number of bedrooms, bathrooms and land size was accurately recorded.

At a glance, there seems to be a positive correlation between the amount of sales and the average sale prices during the period. This is consistent with the notion of “hot and fast” versus “cold and slow” periods in the housing market. However, the results do not seem to entirely match what would be expected in the different seasons.

Summer was the worst performing month in terms of number of sales and average sale prices. It would be expected that since the weather is warmest during summer, if warm weather positively influences house prices then, the average sale prices would be highest in summer. This was not the case. The turn of the seasons, autumn and spring performed the best with both the highest number of sales and highest average prices. Winter did not perform as badly as expected with a significantly greater amount of sales compared to summer and also a higher average sale price. However, if you compare winter to spring, the results appear as you would expect with the average number of sales picking up in spring and prices increasing quite significantly. Overall spring was the standout season which is consistent with the general perception that spring is the best season for real estate transactions.

There are many other factors that could be impacting house prices in different seasons that couldn’t be controlled for in this study. For example, spring not only brings warmer weather, but also a greater supply of stock to choose from. Owners with better properties tend to wait until spring to sell, and properties which have beautiful gardens will be listed during spring to showcase these at their fullest. It is interesting that even though supply and demand both go up as the weather gets warmer in spring, prices also rise concurrently. In general, properties being purchased equate with properties coming onto the market on the other side of the equation. This means that the supply of properties rises alongside the market demand (though slightly later). Since both supply and demand rise, basic economic theory would indicate relatively stable pricing but interestingly the market consistently experiences a price spike as the weather begins to warm up.