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Nominal, Real and Complex Median House Price Indices

 

House Price Indices

Changes in house prices measured by this index are nominal house price movements. In isolation, this is not a true and accurate measure of property trends and price deviation from fundamental values.

 

What Drives Property Prices

Demand

The main drivers are – planning laws, particularly changes in dwelling density and re-zoning; buyer profile; infrastructure; population growth; immigration; and foreign investment.

Supply

The main drivers are – planning laws, particularly changes in dwelling density and re-zoning; infrastructure; new housing estates and subdivisions of land.

Number Crunching

The main drivers are – rental income; outgoings (council rates, water rates, strata levy, insurance, property management fees); tax (capital gains, depreciation, land tax, personal tax rates); improvements; repairs and maintenance; inflation; and interest rates.

 

House Price Bubbles

House price bubbles do occur, despite claims from the main stakeholders.

The main stakeholders are, and include the Reserve Bank of Australia; APRA; Office of State Revenue; politicians; real estate agents; banks; lenders; economist; and developers.

Hence, they all often use property indicators such as home prices to rents; household debt to assets; median house prices to income multiples; mortgages to GDP; household debt to disposable income; and housing affordability to argue that bubbles are impossible.

 

Real and Complex House Price Indices

The nominal index does not measure the deviation of current property prices from their fundamental value.

However, the nominal index can be ‘adjusted’ to calculate the ‘real’ index. Further more, the ‘real’ index can be ‘adjusted’ to constructed the ‘complex’ index.

As a result, when the three indices are graphed together then the property cycle peaks and troughs in house prices become very clear.

 

QED Realty

Jan 3rd, 2016
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