The importance of sales volume trends in the property market
Watching the property market as an active investor or an interested property owner you are, I am sure, always looking to see where the current trend is heading to try and be ‘ahead of the curve’.
There is one basic fundamental that is key to remember and that is the fact that trends in property prices always follow trends in sales volumes.
Sales are a reflection of demand. If demand picks up, sale spick up and as a result property price rise. This is not the case with most other products or services; as a rise in demand usually leads to a rise in supply and that manages through competitive pressure to curb price rises. In the property market as the base product is not homogenous the supply side (vendors) is very poor at responding to the demand side pressure. Just read the constant headlines of the NZ Property Report of the past 2 years – low inventory of houses on the market drives a sellers' market leading to rising asking prices and, as we have seen recently, rises in the selling price of property.
Naturally as demand falls, then sales fall, and again as a result of the inability of the supply side of the property market to adequately and effectively respond to this change, the levels of unsold properties on the market rise and this drives a buyers' market which will see prices ease or fall.
This is why to be a smart observer of the market you need to focus on the property sales volume trend, as the price trend is a ‘rear-view-mirror’.
The definitive source of property sales data is the monthly REINZ report, however on its own it is not clear what this is saying about sales volume at this time. The latest report for the April month stated:
“REINZ data shows there were 7,104 unconditional residential sales in April, an increase of 1,428 sales (+25.2%) compared with the same time last year and a fall of 12.6% compared to March 2013. The increase over March on a seasonally adjusted basis was 0.8%, indicating that sales were slightly stronger than what would normally be expected for this time of the year”
Sales are up, they are slightly stronger and yet they were down!
As with all statistics it is how you look at them; get too buried in the minutia of the granular data and you cannot see the trends, take too holistic a perspective and you risk missing the inflection point.
To assist in this process of spotting trends I have developed a couple of charts which I think show a valuable perspective of the property market.
First the core data of monthly sales data for the past 13 years, this certainly shows that sales have risen considerably since 2010 and just last month topped 8,000 – however 8,000 a month sales were the norm rather than the exception through 2002 to 2007. This speaks to the fact that the current fascination for property transaction is nothing as compared to those heady days of the financial easy-money honeymoon, pre GFC.
The trend of property sales growth comparing year-on-year as the chart below shows, provides a valuable insight.
We have seen 2 years of consecutive year-on-year percentage growth, compare that to the 3 years of consecutive growth at the beginning of the last decade and the 2 years of consecutive decline through 2008/2009 and you get a reminder that property markets, like all markets have cycles – what goes up has to come down.
The final chart is for me the most interesting. It tracks the moving annual total of property sales as a percentage of all private dwellings in NZ.
The long-term average (1992 to 2013) is that 5.9% of all dwellings are sold each year. The current level is 5.0%. The level of transaction is still well below the long term average, but considering the "new normal” that we may well be experiencing in the property market, post the GFC, then we may well not see the heady highs of 10 years ago of 8% of all homes being transacted as that rampant period of speculation and investor fever is well passed.
To me it ‘feels’ like we are going to see some cooling of property sales, this will likely see year-on-year drop in sales growth, this is likely to lead to a rise in available inventory of homes on the market and thereby ease some of the markets and edge them out of being sellers' markets. A consequence of that could well be an easing in the price increases of property and even some degree of a fall. That scenario is good for everyone (possibly with the exception of the real estate agents).