House Prices Still on the Up in Melbourne but is Your One?

Written on the 3 January 2014 by Callum Scott

Melbourne house prices have nearly returned to the record high set in October 2010 and naturally this has added to the ongoing concern regarding affordability, especially for younger first time buyers.

An oft-quoted statistic these days, and quoted in The Age, 3 January 2014, is that the median-priced home now costs 7.5 times median annual household income.  This is compared with the same figure for 1964 which is around three times income (Fairfax Media). 

Is this startling?  Should we be concerned by this apparent difference as a measure of affordability?  Should the figure for now be the same as 50 years ago?  10 years ago? 
Well, for a start the size, and especially the functionality, of the median home now is considerably different than that of 50 years ago.  Homes are much larger, and especially much more sophisticated.  The theatre room then was probably your lucky neighbour’s new black and white TV in their lounge room.

If we for example made the assumption that the median house was half the size 50 years ago, then comparing like with like, the real multiple of income falls to 3.75.  A bit less frightening.  Add in more sophisticated wiring, plumbing, insulation, air con, etc. etc. and it should come down further.  This is a broad-brush view, but the point is we should compare like with like.
Nonetheless, the statistic is useful but should be considered appropriately and with caution.

Likewise, we should interpret median and averaging data in a considered way.  A straight forward median gives us very rough information.  Firstly, it lumps all types of home together and does not differentiate between location, size, number of bedrooms, quality of structure, etc.

A refinement of this is what is known as a hedonic approach.  Attributes such as those just described are added to the data to obtain a truer picture of price movement. (see RP Data Rismark Home Value Index ).  Currently, this methodology indicates that the rise last year is slightly higher at 8.9%.

It has also been shown that the current growth in house prices has been driven by inner and northern suburbs with the outer suburbs still to play catch up.

Therefore, beware of relating an average or median increase for a city or area directly to your property.  You need also allow for the finer detail that relates to the attributes of your property and its location.

However, this current rise probably demonstrates increasing confidence which will also hopefully drive new home construction.  This is an important component of the Australian economy.  We have an increasing population and a current undersupply nationally of housing.  Adequate construction would help to alleviate this whilst increasing overall supply, aiding affordability.

Author: Callum Scott
We knew that our mortgage rate was certainly no...

Shirley and Robert Williams
Read all

Top 10 tips for finding the right mortgage for you...

Google+FacebookBookmark SiteTell a FriendPrintGoogle+Facebook