19 Oct The great divide
Quartile data can point to great opportunities in real estate, but be careful with the numbers when seeking the best result. Kieran Clair [@kieranclair]
There’s an easy error to make when relying on median price data. It’s certainly a fair marker of a location’s central price-point, but remember to broaden your thinking. That median price sits within a range of transactions, and most savvy investors try to buy in the bottom half of a market, with hopes that the top half will drag along capital gains.
Quartiles present a way to assess the top and bottom ends of a price range. They’re an underutilised measure, particularly if you’re an aspirational buyer. Why write off a suburb as unrealistically priced when you may well be able to acquire the perfect property for your portfolio in the lower end of the value scale?
What are quartiles?
Lower (or first) and upper (or third) quartile price points are identified by looking at the full range of sale prices that occurred in a suburb over a set time, and identifying the 25th percentile sale and the 75th percentile sale.
In other words, if you ranked all the sales in a suburb for the year from the least expensive to the most expensive and there were 100 sales overall, the lower quartile price point would indicate the price of sale number 25, and the upper quartile price point would show the price of sale number 75 (see diagram). The price of sale number 50 would be the median.
To illustrate quartile analysis, CoreLogic RP Data came to the party and prepared numbers for discussion.
Within each of the selected capital cities, they’ve provided a list of the top 10 suburbs for houses and the top 10 for units, with the biggest difference between the upper and lower quartile price points for the year to March 2015. The data has been restricted to capital city suburbs, but not sale numbers, and they encompass all accommodation types for both houses and units.
Pros and cons
Cameron Kusher, senior research analyst at CoreLogic RP Data, says quartiles open a window for some investors who mistakenly believe they’re out of the running in a suburb because they rely solely on median price. When used correctly, the data also paints the picture of how high potential buyers might go in an area.
“Looking at the lower quartile gives you an idea – it’s actually closer to what the starting price is to enter into a market, and obviously the third quartile figure gives you an idea of how high prices do get in that market as well.”
There are obvious anomalies, however, when you don’t filter the figures. Kusher says that by nature, suburbs with the biggest distance between the quartiles are blue-chip areas with certain properties achieving extraordinary premiums due to particular aspects.
“You’ve got to understand what’s going on in the suburb. Point Piper (Sydney), for example – half the properties in the suburb aren’t on the water and half of them are.
“There’s a very big discrepancy between waterfront properties and non-waterfront properties and that really shows up in the information here.
“Certain suburbs might have part of their suburb that’s largely industrial and part of it that might be largely residential, and you can see a big discrepancy between the cost of housing across those areas.”
Addresses that contain a mix of traditional and acreage holdings will show extraordinary differences, too.
“For units, it’s often about the product offering. You can find that at the lower end you’re talking about one-bedroom units whereas at the third quartile you’re talking about large three-bedroom, owner-occupier units.”
It seems when distilling down the investment options using quartile data, you must keep a few truisms in the back pocket to fully understand what you’re reading.
Is it useful?
Despite chances for the numbers to be influenced towards extremities, there’s a lot of value in identifying areas with broad quartile gaps.
Firstly, you’ll find suburbs where you can buy in at a proportionally lower amount and benefit from big-money buyers loving the address. Regardless of your non-waterfront position, a blue-chip location like this will fulfil that long-held fundamental of buying quality property.
For renovators, price gap information is golden, because you’re looking for poor, downtrodden and discarded bones to beef up into fantastic as-new abodes. In an effort to avoid overcapitalisation, you’ll need to understand whether a suburb’s buyer base is willing to pay the sort of money you’re aiming to make from the project, too.
Kusher says recognising where your investment is positioned in a suburb’s price range is another arrow to have in your investor quiver.
“Everyone knows that in your own suburb, there’s got to be a proportion of properties generally that are better than yours and a proportion that are worse. It gives you a good idea how to rank where you sit.
“You might find that the lower end stock doesn’t appreciate as quickly in the suburb as the higher end stock and vice versa in certain areas.”
He says investors should be across as much information as possible when looking at their portfolio.
Along with the price gap data, he also believes looking at price performance is useful, but only in the context of what your investment goals are.
“Housing is a long-term asset class. What you need to look at is how it’s going to perform over a long period of time… if you’re buying for investment or yield, those sort of things are important to consider as well.”
We’ve presented the data to experts across four capital cities to see where it shines and where it stumbles.
In our largest capital city, quartile ranges are on the grand scale – somewhat akin to the extraordinary prices already achieved in its blue-chip suburbs.
Nick Viner, buyers’ agent with Buyers Domain, says quartile gaps are useful in theory but shouldn’t be relied upon without an intimate knowledge of the suburbs they’re describing – particularly if renovating for profit is your goal.
“Have good knowledge of the chosen suburb. Have a clear idea about the renovation and resale costs, and a good understanding of the re-sale market so you could target the property to the most suitable demographic.”
Viner agrees suburbs require a good volume of sales to make the analysis effective, and in many cases among the dataset above, less than 20 sales would raise a red flag for him. That said, he believes there are a couple of interesting options among the numbers.
“Assuming the strategy is to buy low, renovate or rebuild and on-sell, I’d say that based upon the data provided, Palm Beach looks to be a good bet. This is because the median house price is the second lowest on the list meaning the entry price is more affordable than most of the other suburbs listed. Yet, the difference between the first and third quartile prices in Palm Beach is over $2 million along with the top half of the suburbs listed – excluding Point Piper.
“Be aware, however, that the Palm Beach market tends to be seasonal for obvious reasons.”
Melbourne provides for some of the most attractive, and priciest, housing in the nation so it’s no surprise there are great quality suburbs listed among the dwellings in the table.
Adam Adamczyk, a property adviser with WBP Property Advisory, says quartile gaps are interesting and useful but should be approached with caution.
“The methodology may lead some investors to identify suburbs with lower limits that fall within their buying range, however the lower quartile often represents the least desirable properties within a suburb.
“Purely data-focused investors can suffer from confirmation bias, a process by which investors interpret data and information in a way that confirms a pre-existing belief or decision.”
Adamczyk is also wary of those suburbs with small sample sizes, such as Campbellfield, Burnley and Eaglemont,
Looking at the list, Adamczyk says there’s already high demand for areas such as East Melbourne and Middle Park.
“Like East Melbourne, Middle Park is also very tightly-held. It’s wedged between the beach and Albert Park Lake, and boasts wide streets and stunning examples of period homes.”
He thinks Parkville in Melbourne’s central north is a good pick.
“It’s just a stone’s throw from the Melbourne CBD, hospitals and universities, and close to cafes, restaurants and retail facilities on Sydney Road. The area also comprises lovely Princess Park, Melbourne Zoo and is well-serviced by public transport.”
Adamcyzk says many of the areas that are appealing for detached homes would also feature among his picks for units. He does, however, cite Malvern as a great attached-housing location.
“Particularly in Casgoigne Estate, which is home to stunning examples of period houses, dispersed among which are beautiful older style and period apartments with original period features and an abundance of character.”
Brisbane already benefits from an affordability gap, with investors coming from across the state’s border to buy reasonably-priced real estate. In many respects, this makes quartile gap data even more useful in the Sunshine State capital, as the relative price points are tighter.
Carolyn Campbell, managing partner at Property Searchers, believes most of the locations listed in the dwelling table provide opportunities for investors.
“All of the suburbs listed provide investment potential, aside from Burbank, Gumdale and Brookwater, and are of strong interest to owner-occupiers and investors historically and ongoing.”
Campbell likes Bulimba, Hawthorne, New Farm and Teneriffe, with access to facilities and services, as well as proximity to the CBD, all coming into play. For units, she’s again keen on these suburbs, but brought a few other locations into the mix.
“Teneriffe, New Farm, West End, Hawthorne and Bulimba are all very strong performers.
“They offer excellent proximity to CBD, airport, bayside, river, cafes and boutiques and are sought after by a broad demographic.”
As a counterpoint, Simon Pressley, managing director of Propertyology, isn’t a fan of adopting quartile gaps.
“Our research on historical performance of markets right across the country confirms that the biggest influences of price fluctuations are affordability and economic development. We place heavy emphasis on economic data, as opposed to real property data.”
Pressley notes the majority of suburbs highlighted by the data are affluent areas, which are susceptible to broad price gaps.
“The logical reasons for such wide price variances often relate to dwelling style, land size and quality of refurbishment.”
Liz Sterzel, managing director of Property Wizards, says Perth’s recent market performance means blue-chip locations have become more price accessible.
“Perth’s property market has softened over recent months, which has led to some price drops in the higher end of the market, including the suburbs with the greatest price differences in RP Data’s report.”
Sterzel says quartile gaps should be used as a complimentary metric in your overall analysis.
“This strategy can be useful for investors who are looking to accelerate capital growth through adding value to their investment property, as it identifies those areas which may have a higher potential resale value.
“However, investors should be very careful when selecting a property… Investors need to do their research and consider that sometimes it’s impossible to add enough value to reach the level of the premium segment prices.”
Sterzel says among the housing data listed, City Beach sticks out for the right investor profile.
“Investors who are comfortable with a higher level of risk, a higher budget and the willingness to do their research could do well by investing in City Beach.
“The local council is currently considering an amendment, which will give some properties the potential to be redeveloped at a higher density, providing new avenues for investors to add value through subdivision and development.
“City Beach is also the closest beach suburb to the CBD in Perth.”
For units, Sterzel suggests quartile gaps aren’t a great metric as unit investors generally place higher reliance on cash flow than capital gain. Regardless, she likes the inclusion of West Leederville due to its lower entry-level price point and proximity to the CBD.
Quartile gap analysis is an underutilised metric that has its place for the right investor, however it definitely needs to be used correctly.
It’s most effective in areas with high sale volumes and is often appropriate for investors looking to buy low and add value.
When available, analyse down to accommodation types e.g. three-bedroom houses only, which will help reduce anomalies.
Finally, when looking to buy into the localities, an intimate knowledge of the suburb, even down to street level, is important. Understanding what’s driving the quartile gap is imperative to avoid making a bad choice in a good location.
Investors should start looking beyond just median prices if they want to get a complete picture of their suburbs of interest, or they might find there are profitable buy-in opportunities that have fallen off their radar.