Stop looking at the performance of house prices

Date Published: 15 April 2020

Almost every potential house buyer, at some point, will utter some version of the words “what are house prices doing at the moment?”.  It’s an understandable concern.  You don’t want to purchase a house today for $800k if it’s going to be worth $760k next year.

The problem with data on house prices

The vast majority of data that buyer use is spread over entire cities.  “Auckland house prices moved by x%” is the quote you’ll hear most often. For example: For December 2019, Residential House Values for different cities were (credit to QV for these statistics):

  • Auckland: -0.1%
  • Wellington: +8.6%
  • Christchurch: +2.3%

What do city-wide house prices tell you about the market?

Let’s look at Auckland. As above, from December 2018 through to December 2019 the market lost 0.1%. But what does that tell you? Looking at individual suburbs gives a much clearer picture of how much each suburb has performed over the year

House prices by suburb in Auckland Dec 2019
Key for house prices in suburban Auckland for December 2019

In the image above, Grafton rose 4.4% for the year to December 2019. A few suburbs over, Westmere dropped by 10.4%. A difference of 14.8% over a few suburbs!

Why do suburbs vary such a lot in house prices?

The reason for these variations are vast but, as an example, could include:

  1. new infrastructure making one suburb more accessible to the city or airport (the Waterview Tunnel opened during this period)
  2. house prices were previously over-valued in one suburb (meaning they dropped as a result) and under-valued in another (meaning they can more easily increase)
  3. a large local business could close down meaning local employees were forced to sell at reduced prices

Number 1 and 2 would be easy to predict. New motorways and tunnels are known about for years ahead of opening. Trends in particular suburbs can be looked at to see what is over-priced or under-priced.

Number 3 is harder to predict and may be more relevant in the post-Covid 19 world. It is almost impossible to know if a significant local employer will close and cause a shift in the market.

Outliers that affect house prices in suburbs

There are plenty of suburbs that have a wide range of house values. An analysis of sales in the Karori area in Wellington between 1st October 2019 to 31st December 2019 showed the range of $350,000 as the cheapest house through to $2.4m for the most expensive (credit to RPNZ for the information). It wouldn’t take many sales of the “upper end” houses to show a rise in “values” in Karori.

What is “a drop in price” anyway?

A significant amount of people may disagree but it’s arguable that a 5% reduction in house value is not a technical “drop”. Sure, your $800k may now be worth $760k, a paper-based loss of $40k… nothing to be sneezed at. But if you listed that property, it would not be unusual for someone who absolutely loved your house to come by and offer $800k for it. On paper, it’s worth $760k but in reality, your house is worth what the highest bidder offers on the day.

I would therefore argue that anything less than a 10% movement (higher or lower) is simply a market fluctuation. Until you extend outside those boundaries, anyone could walk in and meaningfully alter the sale price of your house compared to your valuation.

So when we are quoted in the media as saying something like “house prices may not move significantly or may reduce a little”, you could take this to mean “current prices, plus or minus 10%, but more likely down a little bit”. Intentionally vague? Sure… But market fluctuations are unpredictable like that.

Fun fact: the historical definition of the term “decimated” (from Roman times) means to kill 1 in every 10 mutinous person as a punishment of the. whole group. The term decimated has come to mean a significant loss of something – ie; “my share portfolio lost 60%, the value was decimated”. Our argument here is that a reduction of value by 10% is a market fluctuation however you could still accurately refer to the property’s value as “decimated”.

For more fun looking at both correct and incorrect predictions of house prices, have a look at our interest rate predictions.

What does this mean for home buyers?

My recommendation is that you try to avoid thinking about house prices and try a completely different strategy. It has just two important steps:

1: Find out what you can afford

There is no point searching for your new property unless you know what you can afford. Talk to your bank or your friendly Mortgage Broker to do the calculations on what you can afford with your deposit and income.

2: Go to a lot of Open Homes

This is extremely important. You need to know what you can get for your money.

Let’s say you are approved to purchase a home of $700k. You need to visit at least 20 homes in that price range (let’s say the $650k – $750k range). What are you getting for that price? Is it 2 bedrooms, 3 bedrooms or 4 bedrooms? Do they typically face south or north (in New Zealand north gets more sun)? How big are the sections?

Sooner or later you will come across a gem. You’ll have been to 20 open homes and know that this one ticks all your boxes (and everyone has different boxes). You know that, if you can get this one for $700k, it’s a bargain.

Key takeaway

Historical data is meaningless. The goal is to know when you have found a good deal by having good, current knowledge of what is available at your level of affordability.

Bonus Tip: Use a feature list

Put together a list of what you are looking for in a house and rank each option as a “must-have” or a “nice-to-have”. Then when you are going through an open home, rank your options from 1-5.

Often this discussion can even bring to light some unusual must-haves between couples. One person may have an open-plan kitchen/living room as a must-have, for example. This makes searching for the perfect house a lot easier.

Some of the features that you might consider is:

  • Distance to work (commuting distance)
  • Distance to child’s school
  • Direction that living room faces (sunlight)
  • Size of the section
  • State of landscaping/garden
  • Number of bedrooms
  • Ensuite
  • Number of bathrooms
  • Kitchen layout
  • Kitchen island
  • Storage space
  • Car parking available
  • Public Transport
  • Age of the house
  • Vendors willingness to sell
  • Neighbourhood feel
  • Heatpump/fireplace

The Strategy To Find Your Next Home (Summary)

Don’t pay too much attention to what houses have done. Instead:

  1. Find out what you can afford
  2. Go to at least 20 open homes so you know when you come across a good deal

Mortgage Lab’s mission is to be the digital town square for financial decision-makers to gain knowledge about their current and future mortgage. Follow us on Facebook and LinkedIn or subscribe to our newsletter to be notified of our latest articles.

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