The Observer Effect and how to know when to trust property market data

Michael Fuller

October 13, 2021

mins reading time

With so much property market data published in the media, it’s hard to tell if this data is causing price movement or simply reflecting what has already happened in a particular market.

This article appeared in the June 2014 Smart Property Investor (SPI) Magazine and was written by Boomscore creator, Michael Fuller.

The reality is that a minority of investors cash-in when they enter the market based on sentiment that is driven by the property market data behind media commentary.

Boomscore is the only property investment company in Australia adopting ‘algorithmic suburb selection’, which means our technology crunches the property market data across multiple third-party data suppliers, compares it against known price growth drivers and then generates a single score – known as the Boom Score – for every suburb in Australia.

Based on my experience, property market data can be the cause of price movement and also a reflection of the activity in the market driving these prices.

As an example, let’s take the recently climbing auction clearance rates in Sydney [at time of article]. The press reports this fact and, as a result, buyers, that were sitting on the fence previously, begin to get nervous that they might miss out, so they enter the market. Prices climb further and the data positively reflects this, so the next wave of buyers enters the market... and so it continues.

I’m often asked the question: do all the property statistics provide an early indication of a market on the upswing? Is it a driver of sentiment and therefore a driver of market prices?

One of the eight statistics (see pictured) our Boomscore algorithm factors into the overall calculation of the ratio between demand and supply is the vacancy rate of a location.

The argument is, if the vacancy rate is very low then investors can assume there is demand for their property and they can expect prices to increase. When vacancies are tight, rents go up and the corresponding value of the property should increase as more investors enter the market, chasing the growing yields. 

Does this mean low vacancy rates that lead to higher rents, in turn leading to price increases, is a capital growth driver? I would say they are a reflection of something about that area that is making it desirable to tenants, and therefore rent increases. What about the often-quoted statistic 'days on market'?

Days on market (DOM) is a good indication of the strength of a particular market. Obviously the speed in which properties sell is a good indication of demand relative to supply, but this is not a driver of prices. It too is a reflection of what’s already happening. What if the average DOM for a suburb is high? Would it mean there is little chance of imminent capital growth? Not necessarily.

Look at the stats for Halekulani, NSW (see below, or visit Boomscore – it’s free). It takes over 132 days to sell a property there. This is way above the benchmark of 92 days for a balanced market. In isolation, this statistic would paint a poor picture for this location. So why is it the other statistics for Halekulani, when combined, suggest the market could experience price increases?

 Vacancy rates are zero while the number of people searching the web for property there is very high relative to the availability of properties. Rental yields are quite high too, meaning vendors do not need to take a big hit on the final sales price – vendor discounting is a solid five per cent on average. 

So before committing to a property in a specific location, ask yourself: how much of what I am about to base my decision on is factual and anchored on known capital growth drivers like new infrastructure, a diverse economy, diverse and changing demographics bringing in a growing level of income?

In summary

  • Make sure you examine the statistics in conjunction with one another
  • Look at the underlying trend in the statistics to determine if there is a growing gap in supply and demand
  • Compare target areas using the statistics and select the winner based on fundamentals price drivers
  • Monitor the statistics after purchase, as they are a terrific selling indicator too. Our free suburb research tool Boomscore can help with this. 

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Michael Fuller, Creator of Boomscore

Michael Fuller

creator of boomscore

Michael created Boomscore to quickly determine the potential of a location for his own investments in boutique development projects. 11 years ago Michael made Boomscore free for anyone buying or selling real estate in Australia.
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