Melbourne Home Values 1970 vs 2021!

In 1970, the median house pricein Melbourne was $16,170, while in Sydney, prices were $27,400. In 2021 dollars (after adjusting for inflation), Melbourne's prices would be $196,020 and Sydney's at $265,095.

Fast forward to 2021, Melbourne’s median house price is a whisker above $1,100,000⁽ⁱ⁾ and Sydney's above $1,600,000⁽ⁱ⁾. This equates to an increase of $903,980 over 51 years (or an average of 9.04% per year) for Melbourne houses and an increase of $1,334,935 (or 9.87% per year) for Sydney houses.

This means that average house prices in 2021 dollars in Melbourne in 2021 was 5.61 times higher than prices in 1970 and in Sydney, 6.03 times higher. In other words, you could have bought five average price houses in Melbourne (with lots of spare change) and six average price houses in Sydney for the price of one average price house in 2021 in these two cities!

“The average Melbourne house price in 2021 was 5.61 times higher than in 1970, while the average Sydney house price was 6.03 times higher.”

Adjustments for Inflation by Property Valuers

One of the most used method of valuation adopted by property valuers is the Market Comparison approach, also known as the Sales Comparison approach. The simplest explanation for this method of valuation is the logic that if you want to know the value of a property (known as the subject property in valuers’ terminology), and an identical house just sold next door, then the sale price of that just sold house (known as a comparable sale or “comp”) would give a clear indication of value of the subject property. Would you agree? You might say yes, as long as the sale is not between related parties (like father and daughter).

Of course, rarely do you have identical properties sold just next door within the last few months and a property valuer will not rely on just one comparable sale (or “comp”). Typically, valuers must find the most similar properties they can, as near as possible to the subject property, and sold as recently as possible. But in certain markets, valuers sometimes struggle to find comps that meet these requirements.

What if one or more of these comps was sold 15 months ago? Would it still be a good comp? Here’s when inflation muddies the water. The valuer would have to ask: “what would be the current value of the 15-month old comp after adjusting for inflation and property price changes from the sale date to the valuation date?” How about a 3-year old comp for the valuation of a rural homestead that has scarce comparable sales? Afterall, you would not be comparing apples with apples if you are using the sale price of a property that was sold 15 months or 3 years ago since the property market would not be the same 15 months or 3 years ago.

“…valuers must find the most similar properties…as near…and sold as recently as possible…as comps…”

For these adjustments, the property valuer will look at the Consumer Price Index (CPI) published by the Australian Bureau of Statistics (ABS) and various property resources for indications of price changes in the location of the comps. It takes experience, market knowledge and the skill of the valuer to derive an “adjustment factor” that is adopted as a multiplier of the comp’s sale price. For example, if a comp was sold 15 months ago (from the valuation date) for $1,000,000 and the adjustment factor is 1.18, then the time-adjusted sale price of the comp would be $1,000,000 multiply by 1.18 or $1,180,000. In another words, if the 15-month old comp was sold at the valuation date, its estimated sale price would be $1,180,000.

How does Inflation affect House Values?

One would expect house prices to increase with in an inflationary environment. This is due directly to higher building materials and labour costs, and indirectly to fuel and transportation costs which will directly affect the prices of newer houses. Furthermore, the value of existing houses will also increase due to the reduced supply of new constructions.

“One would expect house prices to increase in an inflationary environment….due…to higher building materials and labour costs…and fuel and transportation costs..”

As the prices of houses and most products go up, money loses value. Inflation can predominantly hurt low-income households due to increased cost of living. The weekly grocery bills increase or the same budget buys less groceries. When prices for energy, food, commodities, and other goods and services rise, the entire economy is affected.

To tame inflation, the RBA (or Reserve Bank of Australia) will increase the cash rate (that has a direct flow-on impact on interest rates) to tamper demand and stimulate savings. Higher interest rates mean higher cost of borrowing, higher loan repayments, increase cost of doing business and more difficulty to meet lenders’ eligibility criteria.

Higher interest rates in turn, reduce demand for houses. Subsequently, when less money is chasing after the same stock of houses for sale, house prices fall.

“Higher interest rates…reduce demand for houses.”

House Values are NOT only impacted by Inflation and Interest Rates

House values are not only affected by inflation and interest rates, though these are two very critical macroeconomic factors. In a high inflationary and interest rate environment, some houses will perform better than average because of the specific attributes of the property.

Can you walk to shops, schools, parks? Do you have a view of a lake, hills or a cemetery? Is the house in a poorly maintained condition or newly renovated with an appealing facade makeover. Do you have a block of apartments looking over your backyard or are you next to a serene creek?

Therefore, in addition to location some other factors that property valuers must account for when reviewing comps include desirability, proximity of comps to the subject (the closer the better), date of sale (more recent sales are better), house size or building area, block size or land area, age and condition of the house, street and internal appeal and house amenities.

Note: In this article, "house" can refer to a freestanding house, a townhouse, a semi-detached house, a terrace house or a villa unit, all landed properties.