Step 3 - Assessing Trends

The interaction between the supply of housing and the demand for housing generates price outcomes in the housing market. Supply shortages and high demand will lead to higher market prices, whilst oversupply and low demand will have the opposite effect on prices. Relative price levels over time and across geographic or political boundaries are thus a reflection of local dynamics of supply and demand. Note that prices at any given time only reflect the prices of the amount of ‘active’ stock – housing stock actually available for sale or available to rent on the market at that time. This section examines house prices, rents, housing stress and vacancy rates as indicators of the state of the local housing market.

Context of the analysis

Depending on how you have defined your housing market, it will be important to consider your local area in the context of surrounding areas. Using the Local Government Area (LGA) as a study area in our market analysis can provide a misleading picture when the overall operation of the market is examined. The market may appear to be in ‘balance’, but this could simply be because prices may have forced many people out of the area in search of more affordable housing.  In other words, the housing problems may have simply been exported into an adjoining area.

House prices

There are a number of sources of data on house prices. However, these data sources may need to be considered with care, particularly concerning the issue of timeliness. The Department of Housing Rent and Sales Report is a suitable data source for prices and rents. Data from this publication has been extracted in Table M1 of the Housing Kit Database.

The price data in the Rent and Sales Report is based on sales statistics provided on the ‘Notice of Sale or Transfer of Land’ form that is lodged with the Department of Lands (Land and Property Information division) after the settlement of contracts. Sales prices are not reported in any geographical area where there are ten or fewer sales. Statistics calculated from sample sizes between 10 and 30 are shown by an ‘s’ in the relevant table. Use this information with caution, especially when assessing quarterly and annual changes. In non-metropolitan areas, only statistical subdivisions are available (not LGAs), because of the smaller number of sales in many non-metropolitan areas.

The median sales price is the most useful data item — it marks a point at which equal numbers of properties are below and above the median value. Unlike means or averages, medians are not significantly affected by unusually high or low values.

Individual sales are allocated in time periods according to their contract date since the sale price is usually agreed on or before the contract date. In many instances, there is a considerable time lapse between the contract and transfer date. Sales data are reported three months after the end of the reference quarter, when about 80 per cent of the contracted sales have been notified. The quarterly and annual changes are based on revised figures for the previous quarters. (The figures are revised because more property sales are reported.) Since a variety of factors create anomalies in the sale price attributable to particular properties, the lower and upper five per cent of sales prices in each LGA are excluded. At the LGA level, this does not affect the median but moves the quartiles slightly towards the median. Strata title properties usually include town houses, flats/units and so on, while non-strata properties are usually separate houses.

Rents

The Department of Housing Rent and Sales Report provides a guide to rents in your region. Stable rents indicate reasonable balance between supply and demand for rental dwellings in the area. When analysing rents it is important to remember that rents may have a seasonal pattern. For example, they may increase when the university year starts or during holiday periods.

When median rents from the Rent and Sales Report are used to examine trends in a local housing market, care must be taken. It is quite common for a number of negative quarterly changes in median rents to occur following large increases in the previous quarter. These variations are related to the method of data collection, which measures rents by taking a sample that is not random — it records the data only for bonds lodged during the quarter. The properties for which bonds are lodged in a particular quarter may be atypically low or atypically high. In these cases, when the next quarter is compared, median rents may subsequently decrease or increase significantly.

Housing stress

There has been much debate in recent years about appropriate measures of housing stress (see Addressing Affordable Housing). While simple ratio measures of housing stress (that is, housing costs divided by income) have a number of shortcomings, they are simple to calculate and are available from the census. The benchmark is usually set at 30 per cent — that is, it is assumed that lower-income households paying more than 30 per cent of their income in rent or mortgage costs are experiencing housing stress. Lower-income households can be defined in a number of ways. The two most widely used approaches are:

• those households whose gross income falls in the bottom 40 per cent of the income distribution; or
• the (larger) group of households who have gross income below 120 per cent of the median household income. 

Table M2 of the Housing Kit Database contains numbers of households with household income below 120 per cent of the median household income paying more than 30 per cent of their income in rent (by LGA). This information has been compiled by the Department of Housing and uses Census data as the main building block.

Housing affordability

A standard test of affordability of housing in the housing market is “at what price or rent do housing costs (rent or mortgage) exceed 30 per cent of gross household income?” Tables 1 and 2 in the section on Addressing Affordable Housing provide an indicative guide to the rents and house prices (sometimes called price points) that will be affordable for lower-income households based on this test. The first table below shows the cut-off for the cost of renting or purchasing under this benchmark for incomes ranging between $20,000–80,000. The second table shows the same information for defined target groups (‘very low income’, ‘low income’ and ‘moderate income’ households). These categories are sometimes used to determine to whom affordable housing should be allocated. (See, for example, the definition in the NSW Environment and Assessment Act 1979 as amended in 2000.) Calculations based on adjusted median income levels for Sydney and for the remainder of NSW respectively are shown in this table.

It is possible for councils to calculate local price points for housing that is affordable to the low-income population in their area from census data. However, between census periods, this may not be very accurate as house prices and rents in particular can change quite sharply.  Data is presented in Table M3 of the Housing Kit Database.

More discussion of measuring the affordability of housing is given in the Kit accompanying document, Addressing Affordable Housing.

Vacancy rates

Another good measure of the state of the private rental market is the vacancy rate. An industry rule of thumb is that a three per cent vacancy rate represents a balance between supply and demand for rental housing. Less than three percent represents a shortage and will lead to upward pressure on rents. However, consistent data on vacancy rates is difficult to obtain. A possible surrogate variable is the ratio of new bond lodgements divided by total bond lodgements.

Next Step: Interpreting your findings