Taoyuan Nights

From the Taipei Times, July 31 2007:

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New report paints mixed picture for housing market
By Jessie Ho and Amber Chung, Tuesday, Jul 31, 2007, Page 12

The housing market continued to boom in the second quarter as both the value and quantity of properties for sale increased, but whether the supply would be absorbed by the market has yet to be seen, a market report released yesterday said.

The report — from Cathay Real Estate Development Co (國泰建設) and the Taiwan Real Estate Research Center at National Chengchi University — showed that in the last quarter, 25,334 units worth NT$248.1 billion (US$7.56 billion) were put on sale, up from 19,663 units worth NT$214.8 billion in the first quarter.

Pushed by high-priced apartments and suites, the price of housing in Taipei City has continued to rise, increasing from NT$460,400 per ping (3.3m2) in the first quarter to NT$489,400 per ping in the second quarter, the report said.

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You need to read between the lines carefully with housing data, to see what is really being said. Here, the claim is made that the price of housing has ‘continued to rise’ and that the housing market has ‘continued to boom’. But what is really given here?

- Asking price? (initial price sought?)
- Agreed price? (final price negotiated?)
- Achieved price? (the money that ends up in the bank, including transactions that fall apart?)

In fact, it’s the first; and this is often not a reliable measure of what is happening in the market (whether rising, falling, or stagnating). If I told you that X amount of Chinese food went on the ‘market’ today, and that Y of it sold - do you think it would be the ‘average’ priced piece of food that sold? Or probably more of the cheap stuff? It’s very much the same with housing, and in housing markets with low turnover, you often find a ‘two-speed’ market forms. A two-speed market is where high-priced sellers sit and wait for a year at a time, while lower-priced sellers clear their properties in weeks.

Here, we see that the collective value of housing ‘went up’, and also that the number of houses on sale went up too - in fact, considerably more. Let’s do the math:

1st quarter: 19,663 units collectively priced at 214.8 bn = 10.9 million NTD per house on average.
2nd quarter: 25,335 units collectively priced at 248.1 bn = 9.8 million NTD per house on average.

Implied quarterly drop in average asking price: 10%.

Quarterly turnover? Down from 30.14% to 27.43%. Doesn’t sound like much does it? But that means houses have rapidly gone from ‘10 months to sell’ to ‘11 months to sell’. This is particularly interesting, given that the number of estate agents needed to achieve that lower level of turnover was vastly higher than in the first quarter! (see the original article)

Being honest, I don’t think ‘mixed’ quite describes that performance. I don’t think ‘housing boom continues’ quite catches it either. In fact, I think completely frakkin awful far better describes a 10% drop in price and 10% drop in turnover - in just 3 months!

Consider also, this was as we entered the summer - which in almost every country of the world is one of the best times of year to sell a house, as opposed to a bone-chilling winter! Of course, I’m sure someone will write to tell me that Taiwanese people in fact LOVE going out to view houses in the bitterly cold winter weather.

Now, time to get even more skeptical. Did you notice I used the words ‘priced at’, rather than ‘worth’ as the original article did? That’s because the worth of something, contrary to the Taipei Times belief, is not actually defined by its asking price. If I offered you a house for free, would the house be worthless? If I offered you a tasty 12″ pizza for 1 million NTD, is it worth 1 million NTD? Of course not!

There’s a stronger argument that ‘achieved prices’ measure a sense of worth, where worth means ‘what people are prepared to actually pay’. But if some dumb guy pays 1 billion NTD for a Big Mac, does that make all Big Macs worth 1 billion NTD? I say, hell no - of course it doesn’t. And that is as true of houses as it is of Big Macs. There is nothing magical about a collection of bricks and mud, that makes it different to every other type of item in the world.

Instead, I personally prefer (and recommend) a more ‘financially real’ sense of worth which derives from the financial value of a thing. If I buy a house with cash, and it returns me a rent of 10,000 per month, and after costs I am left with 7,000 per month, then I can compare that with putting my cash in the bank; or shares; or I can compare that with the damage done by inflation. This sense of worth is often imprecise and subject to your own beliefs about the risks and alternative returns involved. But, I personally believe it’s probably the most valuable sense of worth that there is. I encourage you to develop your own meaning of worth by thinking about these issues, rather than believing the absolute junk you are normally fed by the mass media about financial assets.

But, we can be more skeptical still. There are other questions we need to ask about housing data. Is it averaged out over several months, or raw data? Are we considering regions or national figures? Are they seasonally adjusted (taking account of the ‘nice weather effect’) or unadjusted? Are the annual figures a 12 month average, since start of year average, or an extrapolation of the current month’s data? Are the figures measuring asked, agreed, or achieved prices? Net of costs, or without costs? Money borrowed or money spent? Who is measuring (estate agents? the government? banks? surveyors?)? Why are they measuring? What are they measuring (sentiment, prices?) How are they measuring?

In fact, it’s fairly trivial to ‘flip’ between 100 different types of housing data, so that house prices can appear to go onwards and upwards continually each month; or to present housing in a negative way continually. It’s worthwhile to watch journalists do this as they are spoonfed ready-made ‘press releases’ by banks and estate agents. Many such press releases are seemingly published without a moment’s critical analysis.

My all time favourite is the simple, ‘declare victory, and retreat!’. We saw this above in the Taipei times article, where they talk as though this news is actually encouraging! They start by saying the news was ‘mixed’, but then we were soon told ‘the market is continuing to boom’, and then we are told about a collection of statistics going up (value of houses on sale, number of houses on sale, number of estate agencies, …). Take a look at the full article online (or in print). Notice how much time was spent talking about the number of real estate salesmen’s offices in Taipei and where they all opened? Notice how little time was spent calculating the average price of a house, or the consequences of a rise in price per ping in a falling market?

No, most houseowners will worry when they see news of a mixed market, but then they will see ‘market continues to boom’, look at numbers going up, and they will feel reassured. The newspaper has succeeded! The scary headline sold the paper, yet the lovely story of the main article made the reader feel warm and happy.

To end this article, let’s look at the claim that the house price measured by ping went up. Intuitively, many people will think - oh ho - houses are becoming more expensive! But in fact, we’ve seen that collectively the ‘asking price per house’ went down by 10%; so if the price ‘per ping’ went up by around 5%, we can conclude that people have given up on selling big houses (generally) and are now selling pishy little apartments that are 15% smaller on average. Since the ‘achieved price’ should be considerably lower than the asking price in a low turnover market, this ‘house shrinkage’ effect may even be much worse.

As housebuyers in Taipei spend the next 30 years of their lives paying off around $10,000,000 NTD of debt - a sum which bought only a smaller-than-ever-before apartment - I wonder if they will question their sanity back in 2007.

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p.s. As with all my articles, if you notice any numerical, factual, or logical errors in what I’ve written, please drop me an email and let me know. Thanks!