What the Stat? You hear thousands of statistics everyday, and many about property. But are you being led down the wrong path?
Statistics are a double edged sword. Using them correctly and efficiently can mean you are aware of information that may be imperative in your property investment journey. Use them incorrectly, and you could potentially set you, and your investments back in more ways than one.
Why you say? I mean yes, on the face of it, data, or information is key, so why should some be avoided?
Let me quote some more Mark Twain.
Facts are stubborn, but statistics are more pliable. – Mark Twain
Statistics are very easily maskable. There often can be a hidden agenda behind a statistic, or can purport to answer more questions than it really should. As a general rule of thumb I do not base any decisions on statistics given to me until I’ve had a chance to proof them, or get a professional opinion on them myself.
A broad statistic provided to you by the sales person may be irrelevant to the purchase you are about to make – it is important to validate them yourself and confirm that yes it is correct and relates to my purchase.
Here’s a perfect example. Auction Clearance Rate (ACR). Now as an investor, I am sure you have heard that statistic quoted in the media quite often.
Media commentary generally puts a focus on the ACR – but is it really relevant to actually make a decision based on the Auction Clearance Rate? Will a less than favorable number mean your investment dollars are wasted?
ACR calculates the number of Auctions during a certain point (generally a week) that clear, or sell as a percentage. The data is generally designed to include those sold prior, during and post Auction. This is often used as a method of judging the strength of the market.
Now, just bare with me here, this bit is important to understand the context of the statistic – don’t worry too much about the numbers themselves.
Historically over long periods of time, the ACR can indicate a very good indication of market movement, sentiment, as it generally does (in major capital cities) mirror the movement and rate of capital growth, but the danger of this particular statistic is that it can mislead. When measured Quarterly, it is a more accurate gauge as it will filter out any outlying data and provide a clearer picture of Quarterly Results. But on a week to week basis, it can be incredibly misleading.
This also can be contributed in part to the media’s commentary of the statistic. A weekly ACR reported at ‘lows’ such as 60% clearance, is often commentated or alluded to as a falling market.
The past few years (in one of the strongest periods of property market growth in Sydney) have seen very high ACRs, around the 80-90% mark, and now the end is nigh as the clearance rates hit 62.1%* (Domain). Historically however, a neutral market is indicated by 50% approx ACR (in major capital cities).
The same report (dated January 2016) about ACR (linked above) talks about falling property prices and the “cooling in housing markets”, but later goes on to talk about 89.4% Clearance Rates in the high-value Sydney suburb of Drummoyne in Q4 2015 – a quarter where media outlets were saying this was the beginning of the collapse of the property market.
Sydney-wide ACR for that same Quarter was 73.4%. Now, I’m not here to enter the debate of whether Sydney’s Property Market is healthy, strong, moving up or down, or whether the ACR in this instance is accurate, but I want you to think about the information presented above, the context.
With the context, tell me – what do weekly stats like the ACR actually tell us?
The percentage of auctions that sold. That is it. This does not directly indicate a dropping property market. The statement, and the data are not mutually exclusive either way.
The only true information you stand to gain from the ACR is that in that particular time-period, only xx% of Auctions cleared. You do not learn about the strength of the market, or whether it is going up or down. The only thing you know for certain from that statistic is that Auctions are clearing at xx%. Nothing else.
It is important to read the statistic correctly, exactly what it is designed to tell you – not what it is conveniently trying to allude to.
“Rent is increased in [Suburb] last month and it is a fantastic time to buy an investment”.
Great, rents may have increased in that suburb over that month. So does that mean it’s a fantastic time to buy an investment? Maybe not! The rent increase statistic does not directly indicate investment potential or strength.
It is important to differentiate the statistic from the correlating statement.
I bring this up for one main reason. You will hear statistics, numbers, followed often by a description. They will sell you products and pull data to back up their claims.
Data that may be conveniently skewed toward their product. Remember, if it is too good to be true, it often is.
But don’t completely discount statistics or data, but take it with a pinch of salt, and then find out for yourself. Look at the statistic, and research every possible way you can to validate the statistic or piece of information.
Look at the data in context. Understand why it makes sense. It is very easy to twist a statistic to push an agenda.
Statistics show that of those who contract the habit of eating, very few survive. – George Bernard Shaw