The critical indicator of the status of our housing markets
What is a critical, but little-known indicator of the status of our housing markets?
How are our property markets doing?
With so many indicators regularly mentioned in the media, which should you rely on?
When it comes to deciphering these indicators here are a few things to be aware of.
Firstly, it's worth understanding some statistics are lagging indicators and tell you what has happened in the past.
Others are leading indicators and they're a sign of what's ahead.
And there's the days on market (DOM) stat in the mix too.
So how do you work what's what?
- The commonly quoted "median home prices" are a lagging indicator and tell us what has already happened.
- Economic fundamentals are leading indicators and that's what our research team at Metropole relies on to find future growth areas.
- DOM is a market trend indicator.
Now there are many other statistics that also get regularly reported on such as auction clearance rates, immigration numbers, new dwelling construction, infrastructure spending and more.
But the one statistic that's not often mentioned, yet which I've found is a useful indicator of where things truly are at, is DOM. And more importantly, the trend in DOM tells us where our property markets are heading.
So what exactly is it and how does it work? DOM is calculated by the average number of days that properties within a particular category (apartments, houses, villa units etc) are advertised for sale. What I've found is whichever way the DOM is trending is a key indicator of whether we're in a buyer's or seller's market. It's a clear marker of the relationship between supply and demand.
Think about it
If the property market in a particular suburb is hot, properties will be snapped up quickly by eager buyers and DOM will be low, often less than 30 days. And that's exactly the way it was a few years ago in many Sydney and Melbourne suburbs during the boom times.
Fast forward to today, where there are more properties for sale than there are active buyers and properties are languishing on the market, DOM has blown out to over 50 days in many locations.
Understandably, increased DOM is usually followed by vendors discounting the prices of their properties to achieve a sale. This is why I believe it's a solid indicator which astute property buyers should follow to determine the future property price trends in a suburb.
On the other hand when the market turns and buyers return, DOM starts to fall as turnover of properties picks up. And this happens as an indicator before the prices actually start to rise.
Can you now see why DOM trends is an important market statistic to keep track of?
Where do you find these stats?
You'll find all the big property portals and real estate institutes report average DOM for each suburb and then more specifically for different property types, such as three-bedroom homes, four-bedroom homes and two-bedroom apartments.
Now there's no right or wrong number for DOM and apart from the supply and demand ratio, it also depends a lot on market depth.
In suburbs where few transactions occur, for example small regional towns, you'd expect DOM to be higher than popular suburbs where there are more buyers chasing their next home.
And of course, the time of year can affect DOM. Just like auction clearance rates can fluctuate based on the seasonal highs and lows, the same is true for DOM, which often blows out around Christmas time and over the summer holidays.
But wait, there's more
It's important to note there are many other factors to take into account when researching property markets, starting with the big picture macro-economic factors such as the state of the economy, population growth, jobs growth, consumer confidence and finance trends. Then you'll need to drill down to regional factors and local factors such as supply and demand.
However, with the price of almost everything, supply and demand has a huge role to play in the property prices. And DOM is an oft forgotten indicator of supply and demand, take a look in your area and see what you think.
Michael Yardney is a director of Metropole Property Strategists. he is a best selling author and one of Australia's leading experts in wealth creation through property, and he writes the Property Update blog.