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Research Note no. 7 2006–07
House prices
Tony Kryger
Statistics Section
9 October 2006
House prices in Australia
have risen substantially over the past 20 years, far outpacing the growth
in inflation, average earnings and household income.
Nationally, there are four main measures of established house prices—those
produced by the Australian Bureau of Statistics (ABS), the Real Estate
Institute of Australia (REIA), the Housing Industry Association / Commonwealth
Bank (HIA/CBA) and Australian Property Monitors (APM).(1)
The purpose of this Research Note is to examine some of the issues surrounding
each of these house price measures and to look at the trend in house prices
over the past 20 years.
Existing house price measures
The REIA is the longest running house price series, providing quarterly
data on median prices for established houses sold in each of the eight
capital cities. Data are collected from a variety of sources—APM in NSW,
Residex in Queensland, a survey of real estate agents in Victoria
and Tasmania, and state land titles offices in the remaining states. Prior
to September quarter 2004, prices were based on the settlement date of
sales. That has since changed to the date of contract exchange, ensuring
that the pricing point of the series more closely approximates developments
in the market.
The ABS produces a quarterly index of established house prices in each
capital city. Sales prices are determined using Valuers’ General data
combined with data from home mortgage lenders. The ABS improved the timeliness
of its data when, from March quarter 2002, the pricing point of its series
was changed from the date of settlement to the date of contract exchange.(2)
The HIA/CBA series provides median ‘first home buyer’ prices(3)
for established dwellings (houses and units) for each capital city and
rest of state region. Price data are collected by means of a census of
CBA home loan approvals during the quarter. A major advantage of HIA/CBA
price data is that they are dated to when the CBA agreed to provide funds
for purchase. A disadvantage is that although the figures come from a
large national lender, the sample may not be representative of all transactions
in a period.(4)
APM, a property research firm, produces quarterly median house price
data for the eight capital cities, based on Valuers’ General data as well
as agent reported sales data. The series is based on property prices exchanged
in the quarter.(5) This Research Note does not incorporate
any data from APM as data from this source are only provided on a fee
for service basis.
All four house price measures have the disadvantage that they fail to
adjust for improvement in the average quality of houses over time. The
quality of the national housing stock has improved substantially as houses
have increased in size and as the existing housing stock has undergone
renovations and extensions. These improvements result in higher prices
that are the result of quality changes rather than pure price increases.
Another problem faced by the various house price measures is that the
mix of houses (size, quality and geographic location) traded in any period
may be very different from the mix of houses traded in other periods and
from the much larger stock of dwellings not traded and for which no price
data are available.(6) Left unadjusted, price movement from
one period to the next will partly reflect changes in the mix of properties
that are being traded, as well as pure price changes. To minimise this
influence, the ABS uses location (suburb) to group together houses that
are similar in terms of certain price determining characteristics. Those
characteristics are the social and economic condition, percentage of three
bedroom houses and geographic location of the suburb.(7) A
broad based measure of price change is then calculated by weighting the
change in the median prices for each group.
The approach adopted by APM to the problem of compositional change is
to allocate a city’s suburbs into various groups ordered from the most
to least expensive suburb. Typically, there are ten such groups of suburbs
for each capital city. A median price series is then compiled for each
group. By weighting the median price of each group it is then possible
to come up with a composition adjusted median price for the capital city
as a whole.(8)
The trend in house prices
Bearing in mind the differences and problems that exist with each of
the house price measures, established house prices have more than quadrupled
in the past 20 years (Table 1)(9). During this time there have
been two periods when prices rose particularly fast. The first was the
two–year period from 1987 to 1989, when house prices (based on ABS data)
rose by 56 per cent. The second was the seven–year period from 1997 to
2004, when prices rose by 108 per cent. The second period differs from
the first in that it was mainly characterised by strong, but less extreme
rates of increase, sustained over a long period.
The increase in house prices in Australia
has far outpaced the general rate of inflation (Chart 1). On an annual
average basis, house prices over the past 20 years have increased by 7.5
per cent (ABS measure) compared with an increase of 3.6 per cent in consumer
prices. Over the same period, REIA house prices have increased on an annual
average basis by 8.3 per cent, or an increase in ‘real’ terms (i.e. after
adjustment for inflation) of 4.5 per cent.
Another way of highlighting the increase in ‘real’ house prices is to
express prices relative to adult earnings. In 1986, 3.6 years of adult
full-time earnings were needed to purchase a house (using REIA house prices),
increasing to 7.0 years in 2006. However, because households often consist
of two income earners, and because house purchases are made from after
tax income, a better indicator is the ratio of house prices to household
disposable income. On this basis, the number of years of household disposable
income needed to purchase a house has increased from 2.5 to 5.4 between
1986 and 2006. The current figure is somewhat down on the figure for 2004
when a peak of 5.7 years of household disposable income were needed to
purchase a house. (Table 1 and Chart 2.)
Established house prices (which include land) have increased significantly
over the last couple of decades. However, project house prices (which
exclude land) and the cost of materials used in house building, have experienced
increases more in line with the general rate of inflation (Table 2). The
implication is that an important component of the increase in established
house prices is the higher cost of land.(10) The change in
the quality of housing is another factor.
Conclusion
House prices in Australia have
increased substantially over the past couple of decades, both in actual
and ‘real’ terms. However, it needs to be remembered that there are a
number of different house price measures and each is not without its limitations.
Importantly, none of the series measures only pure price change, the movement
in house prices from one period to the next being a combination of pure
price increase, quality improvement and compositional change. Consequently,
all house price series need to be treated with caution.
- Another provider of house price information is Residex, a property
research firm. Residex compiles ‘repeat sales’ indices for Sydney,
Melbourne and Brisbane only, based
on data received from state land titles offices. The series goes back
to 1978 and attempts to control for compositional shifts in the stock
of houses sold by measuring only price changes between successive sales
of the same property.
- Australian Bureau of Statistics, House Price Indexes: Eight Capital
Cities, September Quarter 2005 (Cat. No. 6416.0), pp. 2, 12.
- The CBA/HIA makes an adjustment to the median price of established
dwellings to approximate ‘first home buyer’ prices. This adjustment
was made necessary by a break in the series in the December quarter
1987 after which separate information on loans approved to first home
buyers was no longer available.
- Reserve Bank of Australia,
‘Measuring Housing Prices’, Reserve Bank of Australia
Bulletin, July 2004, p. 3.
- Australian Property Monitors, New housing price series reveals
a flat market, media release, 8 August 2005.
- Reserve bank of Australia,
‘Measuring House Prices: An Update’, Reserve Bank of Australia Bulletin,
June 2006, p. 2.
- Australian Bureau of Statistics, Renovating the Established House
Price Index, Australia,
November 2005 (Cat. No. 6417.0), pp. 7–8.
- Australian Property Monitors, loc. cit.
- A 20 year reference period has been chosen as it is the longest period
for which data is available for all three house price measures. REIA
data has been available from the late 1970s, HIA/CBA data from 1984,
and ABS data from 1986.
- A. Moran, ‘Prices and Planning:
The State of the Housing Industry’ accessed on 13 September
2006.
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