Making cents

Ever confused by the stream of announcements on house prices and how they're rising or falling? At times, it almost seems prices are going up one week and falling the next. What's going on here?

It all comes down to how you read statistics and, to some extent, who's producing and interpreting them.

Which is part of the reason Herald homes is publishing its house price tables on the following pages - to present meaningful statistics in a clear, comprehensive way and reduce some of the confusion about what's happening in the residential property market (not including apartments, flats and bare sections).

The two big players in house pricing are the Real Estate Institute and QV, and they are the agencies the Reserve Bank, economists, banks and market commentators look to for guidance on the way things are going, though monthly reports from the big players such as Barfoot & Thompson are also valuable pointers.

The institute gathers its sales statistics from real estate agencies around the country and, because of that direct feed of data, gives topical analysis of sales. A week or so after the end of any month, the institute lays out the detail of all deals completed by its members - perhaps covering 85 per cent of total national sales.

The information is rich, zeroing in on median sales figures for hundreds of areas around the country and allowing broad conclusions to be drawn on the state of the market for that month. It is especially valuable when large volumes of sales across wide areas are involved - say, all of Auckland or the whole of New Zealand.

But it is less meaningful, especially on a month-to-month basis, when it focuses on narrow areas, such as a particular city suburb or group of suburbs. In those cases, median prices often mask actual trends because, across the short term, they can distort what is really happening.

A drop in the median price by, say, 5 per cent in an Auckland suburb from one month to the next doesn't mean that overall values have slipped by that much. It may simply mean that fewer high-value homes sold that month and that the market is flat rather than in decline.

So the movement in median prices should be seen as an indicator rather than a precise tool to gauge overall value - unless volumes are high and comparison periods are wide.

For the same reason, market-watchers are as much interested in other key statistics - how many houses have sold and the time taken to sell them. These explain a lot about the state of a market and often tell a different story.

A jump in median price when sales volumes are low does not point to a boom. Rather, the laws of supply and demand may suggest prices will slip or plateau when more houses are listed and volumes return to normal levels.

However, back to the institute's public data, which is listed on www.reinz.co.nz. For all its impressive detail, the statistics make it difficult for individual homeowners to get a feel for how things are going in their own little patch, even without the limitations of medians.

That's because the institute sales statistics are in wide brackets that make it difficult - and often impossible - to know what's happening in narrow areas. The "Rodney North" category in Auckland, for example, has more than 50 separate areas under its umbrella, covering patches as disparate as Muriwai, Algies Bay, Wellsford and Kawau Island, and making an "all-in" median price meaningless.

Which leads us to QV, New Zealand's largest valuation and property information company. QV records the result of all sales (including private and non-agency sales), so the volume that passes through its computers is comprehensive, which is why Herald homes is using its figures in this quarterly guide.

But what the institute has over QV is speed of delivery. Real estate companies feed the institute with sales data when agreements go unconditional and the monthly results are revealed publicly very quickly by "head office"; QV doesn't have that direct access and must wait for the numbers from local authorities after settlement, although some information is provided directly by agents. Full monthly data may take 12 weeks or more to filter through.

But QV is very strong in analysis and the depth of its suburban and area median data (it lists values for 293 specific Greater Auckland areas, for example, as opposed to the institute's wide 27 bands) and - as a function of its valuation business - has devised a constantly moving trigger to assess average local values; a mathematical-based guide which doesn't suffer the distortions of median prices.

It's called "E-Valuer" and QV uses it to determine those suburban values that form the first two columns of the Herald homes Property Report house price guide.

E-Valuer estimates the current market value for virtually every residential property in New Zealand, based on recent sales of comparable nearby properties (assuming there are enough similar sales to allow a sound conclusion to be reached). These individual values can then be used to estimate the value across a wider area, like a specific suburb. A similar method is used in Australia and the United States.

As Jonno Ingerson, research director of www.qv.co.nz, explains, the likely selling price of a target property is assessed after being matched against actual prices achieved for homes of similar type, age, floor area, land area and capital value that have sold recently in the nearby area.

While the E-Valuer estimate is usually close to the achieved sale price, at times there may be a difference because the model cannot account for unique property characteristics like a designer kitchen, fresh decorating and classy landscaping - or, at the other end of the scale, a house that's very shabby or sitting beneath high-tension power lines. Other intangibles also come into play: competitive bidding at an auction that pushes the price beyond expectations, say, or an owner desperate to sell and forced to accept a low price.

E-Valuer estimates for individual homes can be bought online through www.qv.co.nz, but if it's a rough guide you're after, take a look at the sixth column in today's tables ("Sales price in three months to 31/12/09 in relation to CV"). This column deals with the capital value (CV) set for most homes every three years by professional valuers using sales data, mathematical models and some property inspections.

Some councils use CVs as the basis to apportion the rates you pay. Others may use different bases such as land value, annual value or a combination of all three. CVs represent market value (less chattels) of properties, including the land and any buildings or improvements, at the time they are set. However values shift over three years, so CVs may not be accurate at a later date. But one way to get a feel for a changing market is to look at the ratio of sales price to capital value - and that is what the sixth column explores.

If you find houses in your area are selling for an average of 5 per cent above CV, apply that rise to your own CV (found on your rates bill, council websites, or qv.co.nz) for an idea of what your house might currently be worth.