Everyone has an opinion on the current state of the Australian property market. Many experts believe that a “bubble” exists in the Sydney and Melbourne markets. We all know that markets are cyclical. As a consequence, if in fact these markets are overheated, they will correct at some point in time. The impact a declining Sydney and Melbourne market will have on the Queensland market will be interesting. Our market is patchy with some pockets preforming well and others flat. During property booms we normally see large volumes of investors entering our market. We are not experiencing this at the moment.

Rather than focus on the “if” and “when” of the property cycle this edition of “Property Matters” discusses the fundamental of “market value”.

Market value

Often we hear the term “overvalued” to describe the state of an overheated market. It is a term used by experts who draw conclusions about the state of the market based on wage to sale price ratios (affordability) and declining yields.

The International Valuations Standards Committee (IVSC) defines “Market value” as ‘…the estimated amount for which an asset or liability should exchange on the date of valuation between a willing buyer and a willing seller in an arm’s length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion.’

In undertaking a valuation the Valuer has regard to historical evidence to arrive at market value. It is the role of the Valuer to gather evidence in the form of settled sales and rely on the evidence to determine market value for the property in which they are valuing. It is the market (buyers and sellers) not the Valuer who sets the market value. The Valuer merely interprets the evidence and makes appropriate adjustments.

In undertaking a valuation of a property which is under contract the Valuer will need to satisfy themselves that:

1. The transaction meets the definition of market value. They will consider the circumstances of the sale, method of sale, parties to the sale and determine if the parties had each acted ‘knowledgeably, prudently and without compulsion’; and
2. The circumstances of the settled sales. The Valuer will only rely on evidence which they believe meet the definition of market value.

If the evidence supports the contract price the Valuer will determine that the price being paid for the property is market value.

I trust this simple explanation assists you and your clients in understanding the fundamental of “market value”.

Median house prices are often reported with great excitement when there is a rise from one period to the next. Personally, I am sceptical about the use of median house prices as a solitary measure in which to gauge property price growth. I accept that the data does provide some assistance, however, believe that to fully appreciate the statistics one must analyse the figures and understand the peculiarities of each sector.

The issues I have are that the data can be influenced by:

1. Low sales volumes;
2. The sector in which property is sold at any given point in time; and
3. The redevelopment or urban renewal of a location.

Low Sales Volume

If you study medium house price tables you will notice that on some occasions they are qualified with only suburbs recording sufficient sales numbers included. I recently studied a median house price table which included data for suburbs with 11 sales but excluded suburbs with 10 sales as they were considered to have insufficient sales volume.

I accept that parameters need to be set when providing data, however, 11 sales in a small suburb such as Newtown (Ipswich) might provide a good base to gauge market movement. Conversely, 11 sales in a large suburb such as Redbank Plains might be insufficient sales volume.

Property Sector Sales

Many suburbs consist of a diverse range in the quality of homes. In buoyant markets you find sales occurring across all sectors, whereas, in tightly held markets you often find low sales volume in the executive residence market. The sector in which sales volumes are high or low can dramatically impact on the median sale price.

Urban renewal/redevelopment

Urban renewal, redevelopment sites and the development of previously undeveloped sites can also influence median house prices. Take for example a slightly older suburb with little development over the last 20 or 30 years. The development of land and construction of new housing stock will impact on median house prices. Suddenly there can be a shift in not only sales volume but also often in the quality of stock sold. Such a shift can influence the median house price for the suburb dramatically.

Overview

I accept that data is required to try and analyse the market and that median house prices can provide some assistance in gauging shifts in the market. However, I strongly believe that one must be fully aware of market activity in any given suburb to fully understand what the figures truly report.

In my opinion, perhaps the best indicator of market movement is the sale and resale of a property where only general maintenance and upkeep has occurred between the two transaction dates. Again though, you need to have volume for the evidence to be accurate.

I trust this simple explanation assists you in understanding the complexities of median house prices.

Savas Varitimos FAPI

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