"Show me the Money" – Statistical approach to residential investment

Who can ever forget Jerry Maguire yelling down the phone at Rod Tidwell, seeking desperately to secure his financial future, “Show me the money…… Show me the money.”

Unlike Jerry, we do not have to negotiate a deal on the spot. Successful investment in residential real estate is borne out of a measured, patient and informed approach.

With the real estate market running hot, and no abatement in sight, the ongoing performance of the sector looks favourable. But how does one best take advantage of the market?

We at Wills Property are constantly looking at how we can help our clients gain an advantage in the market.

Outperformance in real estate is primarily achieved through four avenues:

– Negotiation;
– Strategic Management;
– Development; and
– Market timing.

Of significant interest to us is market timing. While ‘momentum’ drives pricing the heterogeneous nature of residential real estate ensures that those armed with the right tools, and a little effort, can identify optimal ‘windows’ in which to enter a specific market.

At Wills Property, we utilise regression analysis to assess our key markets. Regression analysis is a way of mathematically sorting out variables. It allows us to test market factors against a dependent variable. It answers the questions: Which factors matter most? Which can we ignore? How do those factors interact with each other? And, perhaps most importantly, how certain are we about all of these factors?

Graph 1.JPG

Let’s look at housing pricing in Bronte. The annualised median return for housing across 3, 5 and 7 years (end Dec 16) was 11.3%, 7.22% and 4.99% respectively. The simple average across the 7 year period being 6.24%.

Now while such returns are attractive, as detailed by the total return graph, there are optimal times deal in a market dependent on your desire to buy or sell.

To ascertain an optimal window for investment, placing the number of houses selling/sold, as an independent variable into our regression analysis we are quickly able to ascertain a view and offer our clients significant insight. 

Analysing the number of housing sales in Bronte over the past 10 years our analysis shows a positive relationship between pricing and the number of houses sold. Critically, through regression analysis, we can establish a formula to assist us in the prediction of the median house price in the area.

Median House Price = Number of Sales (for 12 months) X 0.0132 + 1.4161

Graph 2.JPG

Looking at sales to date, on a rolling basis, we anticipate a slight reversion to the mean, in terms of number of sales that are likely to occur in Bronte for 2017.

Let’s assume there will be 80 properties sold in Bronte in 2017.  Applying our analysis:

Median House Price = 80 X 0.0132 + 1.4161

Therefore, Median House Price = $2.47 million.

This compares to median averages of: $3.1 million, $2.76 million, $2.50 million and $2.35 million across 1, 3, 5 and 7 years respectively.

With analysis indicating pricing is moving back toward five-year historical numbers we would also anticipate to opportunity for improved returns over the medium to long term.

It appears that 2017 could be a great year to buy in Bronte! 

Here at Wills Property, we leverage our unique skill sets to our client’s advantage. If you are interested in getting the best out of your property, whether it be through:

–          Improved management;
–          Purchasing;
–          Selling; or
–          Developing.

I look forward to your call…..

John Wills FAPI


M: +61 467 44 38 38
P: +61 2 9387 1700

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