House Prices in Western Australia
Perth, Australia: housing market
This analysis is done far from the place in question. I am going from
figures given for various indices, and clearly I have to accept them,
but cannot check them. So, how do I go about analysing the housing
market in Perth, Australia?
First, I need to know what the average house price is, what the average
rental figure is, what average wages are, and what the affordability
index has to tell me. I then marshall those figures to give me an
I would like to compare house sales with rentals. The cost of the
mortgage should equal the cost of the rent plus or minus 20%. Any
figure further out than a 20% variation will show that price to be
either too high or too low. However, I cant make that calculation as I
dont have access to the figures.
Let's now turn to the underlying principles of expensiveness. The whole
concept of an affordability index was developed by me rather a long
time ago when I was still at college, and the idea was sold to a
Canadian company. The concept has been changed, or tweaked subsequently
by many entities, but the underlying concept is disarmingly simple.
The index is supposed to be an indicator showing when houses become too
expensive to be affordable, and thus this unaffordability will impact
on the ability of prices to increase, and thus warn potential
purchasers that maybe now is not a good time to buy. Conversely, if the
index is low, then maybe now is a good time to buy as there is room for
prices to rise.
As an indicator the index as now generally used is useful but not
conclusive. Prices notoriously in Vancouver and Hong Kong have defied
gravity for years. This is why my original version of the index tracked
tipping points. I dont have a database of figures in order to be able
to do this for Western Australia, but to give you an example of what I
mean, this is how the tipping process works in the UK.
In the London area people are generally prepared to spend up to 60% of
their disposable income on housing. In the South-East that figure is
even higher, however, in Scotland the figure is just 40%. And the
figures vary across the UK.
This means it doesn't so much matter whether the figure is high or low
so much as where the tipping point is. If house prices reach a level
where the mortgage is costing more than 40% of income in Scotland you
can assume that prices have reached a ceiling. Similarly, if the cost
is 60% of disposable income in London, then prices are as high as they
are likely to go.
Knowing these figures gives you a certain handle on whether house
prices have reached a top.
However, the general definition of affordability is given as a
generalised figure that can be, in theory, used throughout the world.
In reality it has severe limitations. It starts with the presumption
that affordability is normal when an average mortgage costs between
three and four times earnings. The higher costs go above this figure,
the more unaffordable a house is, while the lower it goes, the more
affordable it becomes.
The table I usually use can be found at www.demographia.come/dhi.pdf
The basis for this is that a typical homeowner/worker will be able to
get a mortgage of three times income (+ 1 if the partner is working
also). Prices beyond that point indicate increasing difficulty in
making mortgage payments, and will, at higher levels, put the
transaction at risk of interest rate rises.
This means house prices which give us a figure above 4 show they are
theoretically above sustainable levels.
I also recognise the old adage that market prices can stay irrational
longer than one can stay solvent. Hence everything following is for
guidance only rather than an indication that prices may or may not
change. My original affordability index would give the crucial tipping
figures, but as mentioned earlier, I dont have the data for WA.
Australia in general exhibits an affordability index of 5.6 which is
well into expensive territory. (This figure is for last year. Things
would appear to have improved slightly over the course of this year.)
Perth is in this unaffordable zone at 5.9, and therefore house prices
are currently higher than is sustainable in the longer term.
A way of getting a closer handle on the local situation would be to
find the average wage in Perth, then the average house price, and see
whether you have mortgage costs coming in under 3 times income, or over
4 times income. In the median zone, prices are what you might call
normal. Above they are unaffordable, while they are easily affordable
below that zone.
Now look to refine that down to the house type you are interested in by
using rental and sales websites.
You would also look at local equivalences. Long time readers of my work
will know I am a keen mathematician, and I have great respect for the
equals sign. The equation I would use in this instance is simplicity
itself. Housing costs are housing costs. If you live at number 3 and I
live at number 5 and we both live in similar houses then our housing
costs should be broadly similar. If you rent and I buy through a
mortgage, then the cost of the rent should be roughly equal to the cost
of the money.
If one figure gets more than 20% out of line with the other than look
for a reversal. People dont like paying over the odds for anything, and
if you can rent and get largely the sale deal as me on a mortgage, and
my mortgage is costing a lot more than your rent, I'm going to change
Lastly, look at the prospect of interest rate rises, and the economic
situation. Gauging interest rates moves is difficult, but if wages are
rising, expect house prices to rise also, but if they are falling, then
expect stasis, or falling prices.
I trust this not only helps, but provides a simple methodology for
working things out on some future occasion without further outside help.
All of this is dealt with in much more detail in my book on property
matters: The Property Expert's Bible
(Click the link for details.)