Is there really a shortage of properties for sale?
We have been seeing statements in the media for years now, stating how we have a shortage of properties for sale - ever since the property crash in 2008 in fact. However the question I constantly ask (myself as much as anyone) is, if this were a real issue then how come it could continue to be a real issue 6 years later?
I wonder if this issue is as much a function of available data as an intrinsic problem. Prior to 2008 there was no available data on inventory or new listings - the supply side data of the property market. Up until that time the only available data on the property market was transaction data on sales volumes and prices. Then in April 2009 Realestate.co.nz published the first NZ Property Report covering the market in March 2009 looking back 15 months to January 2007. This report provided a whole new set of data particularly centred around new listings and inventory as well as asking price.
The data set of the NZ Property Report covered the period from January 2007 as this was judged the most accurate starting point, due to the fact that the database for the website was truly reflective of the whole market from late 2006 - the inaugural year of the website.
The problem is that without data from say the nineties and early years of this century we have difficulty in accessing what a normal market was, as 2007 was the last of the froth of the property market before the crash and subsequently the market has moved into very different modes over the past 6 years.
I thought I would look at the core data and see what components are valid and what we may be able to shine a light on to see a clear picture of the market to be a true indicator of trends and to answer the question as to whether there is a shortage of property for sale.
1. Inventory data
The actual level of available property for sale on the market over the past 6 years has not changed that much.
It has been as high as 53,000 properties and as low as it is today at 39,000 properties - but then at 39,000 properties that is nearly half of the total current annual sales. Certainly buyer and real estate agents would love to see more properties on the market, but 6 months stock is a pretty good level and in relative terms the availability is pretty consistent.
Inventory on its own does not really help us understand the trends in the market
2. Sales and New Listings data
The supply side data of inventory and new listings, takes on a greater relevance when assessed against the rate of sales through the addition of the monthly sales data which provides a greater contextual insight.
This chart whilst a little confusing with dual axis tries to capture the key data sets and align them to provide insight. Inventory as per the previous chart is measured in actual monthly levels in the grey area at the base of the chart. The red and blue lines measure listings and sales respectively - both are reported on a moving annual total basis. This method of reporting removes the seasonality, so much a component of property data.
The take out from this chart is the almost flat level of new listings coming onto the market over the past 2 years - steady at around 130,000 per annum. Whilst at the same time sales have risen over the same period from an annualised total of 55,000 to 80,000. This shows clearly the component of demand in the market. That demand has not driven more listings to come onto the market despite all the communications from within the real estate industry and yet despite this, inventory has not actually fallen that drastically. This indicates more of a 'liquid market' where sales occur more quickly.
These charts which to me provide insight I know are to many confusing and I have been looking for ages for a simpler indicator of the overall sentiment of the market in regard to supply and demand - something that better answers the question as to the pace of the market and whether there is a shortage of supply. I will note here that I hold the view that price is a lagging indicator and as such tracking the market sentiment of supply and demand will provide the key to future trends in price.
I recently saw this chart from the UK property market showing actual inventory (green bars) matched to monthly sales (blue line).
It got me thinking that this measure had relevance tracking the effective rate of sales each month as a proportion of the available stock.
Producing this chart for the NZ market shows somewhat of a different chart. The seasonality of home sales in NZ seems far more pronounced than in the UK and therefore it is harder to determine easily a trend, whereas I would judge that there are key trends easily determined in the UK data - significant rising sales in the past months matched to falling inventory.
So how to present this data in a meaningful and simple way was the challenge, as I sensed the data contains the core insight needed. Especially at this time where I see the property market slowing and a lack of inventory is not the real issue or the driving factor.
It came to me! - inventory and monthly sales - what we are really looking at is "Property Clearance Rate" - what percentage of the available stock of properties on the market in a month are sold in that month. A quick analysis produced this chart which shows the ratio of sales to inventory.
Again the seasonal volatility makes it hard to see a trend - the dotted line is a trend line overlaid, but as we all know applying a different fundamental equation to the trend line could produce a different picture!
Then it came to me - take the 12 month moving average monthly sales and apply it as a percentage to the available inventory and I think we have what to me is a very relevant picture of the NZ Property Market.
Now I could be guilty of endlessly seeking data to fit a story, but in my mind this is a visual of the property market that to me makes sense. It uses the current rate of sale (adjusted to remove the seasonal fluctuations and short term movements), combined with the available stock which is itself the function of existing unsold inventory, new listings and sales.
The telling image from this chart is the sharp rise in the clearance rate once the property market got into gear around 2011 - that rise, from 9% to 19% speaks to the dynamic market we have seen over this past two and a half years. However what this chart graphically shows which I have sensed is that the market has turned. It turned even before we saw the LVR restriction introduced in October as this chart shows the turning point in August / September of last year and the latest data from REINZ on sales in March only reinforces this fact.
So in my opinion given this declining clearance rate is the key trend and talk of a shortage of properties for sale is nothing but a red herring!