Hedonic index and other data vital to property investment

Hedonic index and other data vital to property investment

research
1 minute read

Hedonic index and other data vital to property investment

December 12, 2018

Experts and seasoned investors have always highlighted the importance of research before diving into the property game, but what factors are most important to consider? CoreLogic’s head of research Tim Lawless defines hedonic index and other data vital to investment success.

Property being one of the most popular asset base across Australia allows aspiring investors to access a plethora of information across multiple platforms. While an abundance of data presents opportunities, it could also delay progress if not processed correctly.

“It's actually really common,—people call it analysis paralysis. You're stuck just trying to work out your numbers way too much,” Mr Lawless said.

“Absolutely, research is really important, as is getting your numbers right. Investment is all about the numbers while taking all the emotion out of it.”

“Anybody looking to buy a property should absolutely be accessing data, drill down to the micro level and look at all the trends. If you're making a decision that's costing you hundreds of thousands of dollars, you really want to be looking at the nuts and bolts.”

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If, like most budding investors, your mind boggles at all the information available, Mr Lawless recommends focusing on three benchmarks that gives the best overall view of the property market and its wealth-creation potential: Hedonic index, stock level and market activity.

What is a hedonic index?

According to Mr Lawless, a hedonic index is the ‘go-to measure for understanding how values are moving across the broad market’.

Simply speaking, a hedonic index is any price index determined through hedonic regression, a revealed preference method of estimating demand or value. Instead of determining a median price through sold properties, this method takes all properties across the region into consideration

In contrast, the simplistic median prices could be rife with issues such as compositional bias, particularly when used for measuring changes in the market.

Mr Lawless explained: “Hedonic index is simply a regression index. Trying to measure values by identifying how many properties have transacted across a region over a certain period and getting the middle price is very compositionally biased. Although it’s a great indicator for understanding the typical price of a home that's selling, trying to compare one period to another is fraught with issues.”

“The ABS stratified median and our hedonic index move very closely with each other. A stratified median simply tries to overcome some of the compositional bias in the marketplace by looking at the median price in different cohorts of the market and then averaging it up across the broad region. That works quite well.

“However, the hedonic index is quite different—we value every single property across the market, regardless of whether it's sold or not. We look at individual properties, look at what their attributes are to really understand the value of a property. How many bedrooms and bathrooms does it have? What's the land area? What's the property type? What's sold around it? Based on all that information, we can then derive an estimated value on that property,” the property researcher highlighted.

If the attributes of a property change over time, particularly capital injections such as renovations, Mr Lawless removes the property from the portfolio in order to preserve the consistency of the research data.

“At the end of the day, once you value every single property across the consistent portfolio and you measure the change in the value of that portfolio from period to period, it gives you a much better understanding of the true value change in a marketplace rather than simplistic price changes.”

Stock levels and market activity

Apart from keeping eye on the hedonic index, Mr Lawless also emphasised the importance of looking at advertised stock levels and the updated volume of investment activity in the market.

Across Sydney and Melbourne, the inventory of properties for sale is starting to build up, but it’s not due to a rise in new stock. Instead, homes are selling much slower at the moment due to affordability issues across the capital cities as well as the overall softening state of their property markets.

Understanding the cause of current stock levels, as well as the trend that it follows, can help investors determine the best way to maximise their earning potential at any point in the market cycle.

“There's less activity in the marketplace, which means a lot more stale stock is building up. Great for buyers because they have a lot more choice and much less urgency, which means that they can negotiate much harder,” Mr Lawless said.

“Once we start to see inventory levels rising, it's a pretty good sign that buyers are back in the driver's seat and they'll put some downwards pressure on prices.”

Finally, looking at the level of investment activity in the market can also assist investors in understanding the level of supply and demand and, as a result, make smarter decisions moving forward.

Studying investment activity must be consistent in order to acquire accurate and updated data of the movements across the market. Investment activity is considered one of the most time-sensitive data as it is updated as often as every month.

According to Mr Lawless: “If volumes are rising, that generally means that there's more demand in the marketplace, and that’s going to put some upward pressure on prices. When volumes are falling, it generally implies less demand or a shortage of supply. Typically, if you see volumes falling but prices rising, that would suggest that there's an undersupply and it’s pushing prices higher as well.”

Hotspot: Queensland

Based on the factors mentioned above, Mr Lawless identified southeast Queensland as one of the top performing property markets across Australia.

Aside from its relative affordability, the region also boasts strong migration and population growth, which ensure a high level of demand for properties across its suburbs and localities.

“Rental yields tend to be not too bad, particularly compared to Sydney and Melbourne, and we're still seeing some stability in prices there. They're only rising roughly in line with inflation. If you look at all the elements in southeast Queensland, they look pretty good to me,” Mr Lawless said.

While most markets are negatively affected by the softening of Sydney and Melbourne, most areas in Queensland are bucking the downward trend, including Gold Coast and SunshineSunshine, NSW Sunshine, VIC Coast, which satisfy the increasing demand for ‘lifestyle markets’.

“The demand is likely fueled by a lot of cashed up homeowners coming out of Sydney and Melbourne who can now get back into the market after they had to cancel back in 2008.”

At the end of the day, regardless of how the market is moving, investors can find good buying opportunities if they do their due diligence and use research to identify markets that can help them make the most out their hard-earned money.

While data is an important first step towards success, actually making the move based on the gathered information will allow budding investors to cross the line between planning and achieving.

“You've got to go with your instinct in some conditions. Even when everything stacks up, you've still got to choose among all the properties that fit your consideration set, then it comes down to negotiating.”

“Generally, the best advice I can give is act. Do your research, but also execute and follow through,” Mr Lawless concluded.

 

Tune in to Tim Lawless' episode on The Smart Property Investment Show to know more about how to maximise research data for property investment success.

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