I like Big Stats and I Cannot Lie

Posted by Daniel Joseph

Inspired by census day, I thought I’d share some nerdy research stuff that we’ve been working on. Understand that with an introduction like that you must be on the edge of your seat, so, in the interests of safety, I ask that you contain your excitement.

In my experience, I’ve found that property economic research is a combination of educated intuition and science. Our success is largely a result of our ability to develop a method that marries both aspects of the process. Here’s an example.

Most of you reading this would know that property markets are cyclical. Identifying the right time in a cycle and acting on that knowledge is half battle of successful investment. Here are two of the ways we’ve turned intuition into science to deliver on our philosophy of market timing:

Growth Ratio

Intuition: the further along a growth cycle we invest the higher the risk of correction and the lower the probability of continued growth. In other words, we don’t want to pay for another investor’s capital gain.

The Science: inspired by the Sharpe ratio (a metric to determine the risk adjusted return of a financial asset), we developed a novel way to systemise our entry and exit in a capital city market. The metric is calculated as the ratio between quarterly property growth and the rate of inflation. An elevated rate for a prolonged period (circa two years/eight quarters or more) is indicative of a market at risk of correction.

Conversely, a low ratio is indicative of a stagnant market. This, combined with an assessment of the demand inducing factors below, provides an effective way to determine entry into a particular property market.

Population and demographic changes
Infrastructure investment
Economic and jobs growth

Sales Volumes

Intuition: if sales volumes are increasing, it follows that demand for property is increasing.

The Science: sales volumes provide an effective measure of the depth of demand in a property market. Our research has shown that sales volumes have a statistically significant correlation to price growth, particularly when a lag is placed on sales volumes. In other words, growth in sales volumes in 2015, for example, tends to lead to price growth in 2016 (hence the lag).

An asset class worth in excess of six trillion dollars, that combines growth with stability, deserves the respect we give to assets like shares or bonds. Make a commitment to educate yourself and take action. Happy censusing.

Posted by Daniel Joseph, on 9th Aug 2016