"Lies, damn lies & statistics (long rant)"

From: Nigel W


Here's a topic to hopefully stir some debate...following on from the previous post. Let me preface it by saying that it is not a criticism of those who love their cap growth stats! I even glance at them myself every now and then...

Capital growth data for suburbs - there's a proliferation of it (and it doesn't always seem consistent).

The logic says...well we can't predict the future, but looking to past performance is one of the best guides you can find. Therefore, if a suburb has shown strong growth in the past (or even better, is next to suburbs that have shown growth but it hasn't yet) then we should buy in the suburb which has shown the higher historical growth in preference to other suburbs.

In my opinion that is all very well in theory, but we don't invest in general theories, we invest in a specific parcel/s of land and buildings which people want to live in and they pay us money for that right. If you're on the acquisition trail - I put it to you that these broad statistics are next to useless.

Let me explain. Instead of spending your time pouring over the latest median movements for your city of choice, wouldn't you be better to look instead at the fundamentals for the PARTICULAR properties which are ON THE MARKET when you want to invest?

By that I mean (in no particular order) - is this house/unit/block close to:

1) water/scenic views
2) convenient transport
3) the cbd
4) other sources of likely employment for my target market of tenants
5) entertainment and lifestyle venues
6) in sound condition or ready for a cheap makeover
7) currently produce or have the ability to produce a market or above market rent (yes i know that i'm looking at stats to find median rents...but I'm arguing about cap growth stats here!)
8) nice tree lined street, parks nearby etc
9) some other x factors...

In doing that "fundamental analysis" (which you'd have to do anyway even if you looked at your cap growth stats to being with) I humbly submit you're going to roughly end up with picking within suburbs that have shown good growth in any event BECAUSE it is the supply of those above factors (plus a little bit of market sentiment/snobbery) which drive growth.

Remember, it is houses/units and the land they are built on which appreciates in value - as measured by valuation or sale price. Whilst the suburb level stats will have something to do with in when a valuer does his or her job (and of course if they're good for your suburb you'll be sticking them in the valuer's face continually) I suspect resales of comparable houses within your immediate vicinity (ie a couple of streets - not the whole suburb) will be more persuasive.

Don't get me wrong - looking at ACTUAL raw sale data for your immediate vicinity is valid and prudent. What I don't think is useful is to look at the data for suburbs as a whole. To extend that logic further - median house prices for cities are I suggest useless to the investor on the acquisition trail. In aggregating all that data from a city as a whole we lose the important unique factors which drive property values. Using these high level statistics might be valid for the stockmarket - where my Comm bank shares are the same as yours - but I don't think its helpful when you're looking to buy.

You can't invest in the whole Market, (we're not talking index funds here - its individual residential properties) so why look at statistics which cover the whole market or a large chunk of it?!

Having said all that - if you're looking to sell...don't harangue me you never ever ever sellers :) then you'll use whatever you can find to convince somebody to pay you top dollar - and if the stats say they should pay you more and they believe the stats then more power to you!

In summary, when your investing - a good deal is a good deal. It doesn't matter what the stats say if you've done your homework. The fact that median values in your suburb are supposed to have risen 20% in the last week is irrelevant if you're trying to sell and no-one wants to pay that much or you're seeking a reval and the valuer says your property is inferior to all the others in that suburb because its between powerlines, a petrol station, a rubbish dump and a meat rendering works!

When you buy well and/or are able to add value then you make your own cap growth. Broad statistics are meaningless -it is actual deals (yours or surrounding ones) that count!

Sorry Residex!

Cheers
N.
 
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Reply: 1
From: Stirling Reid



Nigel,

You are absolutely right about looking at attributes of individual properties. However Residex do a lot better than just quote median prices.

They measure the capital growth (or house price inflation) rates by using the repeat sales method.

This method avoids the trap of indicating that the price in a suburb is going up x amount in 10 years when it is only the quality of the properties that are being built and/or sold that is going up.

This is particularly true for units which are of far better quality now than 10 years ago. I suspect that unit capital growth has been over estimated in the past by quoting median growth. As for the future, the past has a lot to teach us.

I can only speak for the Queensland reports as I have not purchased any Residex Sydney reports.
 
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Sim

Administrator
"Lies, damn lies & statistics & Lotto"

Reply: 2
From: Sim' Hampel


I like to ask the question of historical data in relation to picking the winning lotto numbers based on statistics.

If you look at the numbers drawn in the lotto draw over a period of time (the longer the better), there will no doubt be some numbers that come up more than others.

Now the question is, what assumption should you use to pick the lotto numbers that are more likely to come up ?

I see three arguments:

1. The "historical housing growth data" method... Because a particular set of numbers tend to appear more frequently than others, history as PROVEN that they are the ones to bet on.

2. The "I'm a statistician and I'm okay" method... Because all statisticians know that when looked at over a long enough period of time, all numbers will eventually be drawn the same number of times, you choose the numbers that have appeared the LEAST frequently.

3. The "chaos rules" method... Because all enlightened statisticians know that due to there being no correlation between one lotto draw and the next, the chances of one particular set of numbers coming up and another set of numbers coming up is exactly the same, it doesn't matter which set you choose, you are equally likely to lose !

So what does all this have to do with house price growth statistics ? Absolutely nothing !!!

Because just like the enlightened statisticians know that each lotto draw is completely random (except the rigged ones they run in Victoria :p ), they also know that house sales are dependant on each other !

If you watch a suburb as it enters a boom phase, you will see a number of things:

1. Before boom: lackluster sales, not many properties on the market, no-one really cares.

2. Entering boom: someone managed to get a surprisingly good price for their home. The neighbours of course all tramped through the house during inspections and said "gee... ours is nicer than this !". Then when they see the price it sells for, they think... wow, imagine what we can get for ours now ? And so they list too.

3. Boom gathers pace: so more and more people put their property on the market, more and more sales get great results. Investors and buyers see the great jump in sales and notice that the suburb is booming, so they go in a buy too because they just can't miss out now !

4. Boom hits top gear: Residex publishes historical data showing the great growth happening in the suburb. All the stats watchers highlight this info and say... wow ! we need to invest in this amazing boom suburb !

5. ???

So what is my point ? I dunno, I'm just raving on ;-)

I wonder though... when it comes to Residex predictions and buying property during boom times like these, do the Residex predictions become self-fulfilling ?

It wouldn't be difficult... all you have to do is, A) have a good name like Residex, B) pick a suburb that has all the right attributes of location, property, employment, water, etc... then, C) wait for all the stats buyers to read your predictions then go and buy there, hence pushing up the prices and proving you right !

Just a thought !



Sim's random kinda-meaningful cliche-quote:
~ ...don't give in to hate -- that leads to the dark side... ~
 
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"Lies, damn lies & statistics & Lotto"

Reply: 2.1
From: See Change


Nigel

obviously the choice of the individual property is of paramount importance . A dog is a dog where ever it is.

BUT

wouldn't it be nice to have a perfectly positioned property in an area that is also perfectly positioned (in relation to your aims). Seems to me the best of both worlds.


Happy investing see change
 
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W

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"Lies, damn lies & statistics & Lotto"

Reply: 2.2
From: James Johnson


Great post Sim,
Does it matter if it's a self-fulfilling prophecy if you're in there being fulfilled as well? As long as you get in pre-gentrification stage of course...

Jimmy
PS like your Star Wars quote

Come to the dark side Sim...
 
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Reply: 3
From: Paul Roberts


Granted, stats and their inherent results are only as good as the model used an the person handling them and it is historical data at best. But even in shares, derivatives and any form of investment/investigation data as well as fundamentals are relevant.
To dismiss data is to undermine a large proactive tool. If evidence based medicine were to be ignored we would have large catastrophes, eg tholidimide. The same relates to any investigative tool in any field. Broad based filtered and credible data sends you in the right direction and then fundamental investigation leads to success.
A large ship plots a course to reach a specific goal, this is based on the best current maps available. As they approach their destination they pick up a pilot who has a current knowledge of the best way to achieve their outcome. To ignore the maps or pilot is at their peril and we may all fall off the edge of the earth!
So to reiterate, how dependable and accurate have people found the Residex data?
 
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Reply: 3.1
From: Owen .


A friend bought a 1br apartment in Alexandria this time last year for $194k to live in. The apartment next to him which is a mirror image, same size, same view, same condition (we had a look) sold last weekend for $249k. 25% isn't bad for a year. Residex quote in the last API magazine that apartment in Alex grew by 2.49% in the last 12 months!!! Doesn't compute.

Nothing special has happened to the building in question or the area in the last year except a few new building around the place (like everywhere else). I think Residex are great as a starting point but as always, do your own due diligence and you will always find a deal.
 
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Reply: 3.1.1
From: Rolf Latham


Hi Owen

Residex figures are by neccesity based on settlemts and indeed they tend to be about three months old. A sale is not a sale until it is settled.

The current market where there is zilcho stock has seen a number of areas "show" 30 % in 6 months even.

Stats are really there as a sieving guide only, and nothing, absolutely nothing beats knowing your market first hand - there are no short cuts.

Also when the median price jumps like it has due to a temporary lack of ESTABLISHED stock it can also be argued that recent sales may not be statistically valid - just ask some of the valuers at the moment - their heads are spinning !

Ta

Rolf
 
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Reply: 3.1.1.1
From: Owen .


With you 100% on that Rolf. I can't wait to get to the stage when I have a valuer working for me rather than the bank. Then we'll see what things are really worth.
 
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W

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"Re: Lies, damn lies & statistics (long rant)"

Reply: 3.2
From: Terry Avery


One has to wonder how Residex adjusts their stats for second tier marketing.
If a company pushes property in an outer suburb to interstate investors then
surely the stats will show capital growth in that area at a remarkable rate.
But if vacancy rates are high then that bubble will quickly burst, as we are
seeing in the reports of the Gold Coast. Like Michael says you have to
answer the question "Why is it so?"

Cheers
 
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"Re: Lies, damn lies & statistics (long rant)"

Reply: 3.2.1
From: Rolf Latham


Hiya

As far as I understand it , if its new property it wont affect the median price much, since the model is based on resales rather than median price models.

The market is the market is the market even if its 3 tier. Once again youve got to do the homework. Like why is a new townhouse 30 k more than a 1000 m block with a 3 bed freestanding home ? ding ding ding

Ta

Rolf
 
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