Forget Median Prices! Discover the Real Way to Gauge Housing Affordability

Imagine waking up tomorrow morning to discover that the median house price in your suburb had fallen by 5%.

Would you assume your home was now worth 5% less? Would you worry that your investment portfolio had taken a hit, or perhaps conclude that housing was finally becoming more affordable?

Well, I'd suggest you think again, because there's a good chance the value of your particular property hasn't changed very much at all.

You see, one of the most widely reported statistics in Australia's property market is also one of the most misunderstood.

Every month we're bombarded with headlines telling us that median house prices have risen or fallen. Commentators use these figures to declare that markets are booming, falling or becoming more affordable, while buyers and sellers make important decisions based on what they've read.

But the median house price doesn't actually tell you how much the value of a particular property has changed. It simply tells you the middle price of the properties that happened to sell during a particular period.

And in today's more complicated housing market, that distinction matters enormously.

I recently revisited this issue with leading demographer Simon Kuestenmacher, who had written about it some years ago in The Australian.

Our discussion highlighted how Australia's changing workforce, household incomes and housing preferences have made median prices an increasingly imperfect measure of what's happening in our property markets.

More importantly, it raised a question that deserves far more attention: how should we really measure housing affordability?

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Why median house prices can be misleading

Let's start with the basics.

The median house price is calculated by taking all the properties sold in a particular area during a given period, arranging them from cheapest to most expensive, and selecting the middle sale.

As Simon Kuestenmacher explained:

"You take all the homes that have been sold and you just line them up by price, and you pick the middle one."

It's a straightforward calculation, and generally more useful than the average price because it isn't as easily distorted by unusually expensive transactions.

For example, imagine a suburb where most homes sell for between $800,000 and $1 million. If someone sells a magnificent $5 million mansion, the average price could jump considerably, even though ordinary homes haven't increased in value.

The median is less sensitive to these extremes, making it a useful starting point.

However, its simplicity is also its weakness.

And the mix of properties selling can change dramatically.

That's particularly relevant in the current phase of Australia's property cycle, with higher interest rates, subdued confidence and many homeowners choosing to sit tight.

Owners of more expensive homes, particularly those who aren't under financial pressure, can often afford to wait for better market conditions. Meanwhile, transactions continue in more affordable price brackets because life doesn't stop when the property market slows.

People still get married, divorced, relocate for work, downsize or experience financial circumstances that require them to sell.

Consequently, if fewer expensive properties sell and a greater proportion of transactions occur at the affordable end, the median can fall even when the underlying value of comparable properties has remained relatively stable.

The reverse can happen when more premium homes change hands.

And this distortion isn't confined to capital-city statistics.

Take Brighton in Melbourne, where I live. Within the same suburb, there are several distinctly different property markets. Homes close to the waterfront command substantial premiums, while properties further inland appeal to different buyers at considerably lower prices.

If several waterfront properties sell one month and mostly smaller homes sell the next, the median could change significantly without telling us much about underlying values.

In more uniform outer suburbs, where homes have similar characteristics, median prices may be more representative. But in established suburbs with diverse housing, even properties on opposite sides of the same street can have vastly different values.

That's why understanding the local market and comparing similar properties remains so important.

Australia is no longer the middle-class society it once was

One of the most interesting insights from my discussion with Simon was how Australia's changing economic structure has made the median home less representative of the typical household.

Think back to Australia in the 1960s and 1970s.

We were a more uniform society, with a large middle class, relatively similar lifestyles and a substantial proportion of workers employed in middle-skilled occupations.

The typical family lived in a modest detached house, often with a Hills Hoist in the backyard, perhaps an outdoor toilet and, as I reminded Simon, an incinerator for burning household rubbish.

There was a shared suburban experience across much of Australia.

Simon explained that the distribution of households and their economic circumstances more closely resembled a bell curve, with relatively few people at the extremes and a large concentration in the middle.

In that environment, the median home was reasonably representative of what many Australians actually lived in.

But Australia's workforce and household finances have changed considerably.

As Simon explained, our economic structure has become increasingly polarised, with greater differences between households at the upper and lower ends of the income and wealth spectrum.

One factor has been the transformation of employment.

Historically, Australia had a substantial concentration of middle-skilled jobs, including trades and manufacturing occupations, which supported a broad middle class.

Today, the employment landscape is more diverse, with growth in highly skilled professional occupations alongside large numbers of lower-paid service roles.

Because education, occupation and income remain closely connected, these changes influence the types of homes different households can afford.

Simon suggests that rather than the traditional bell curve, our society is moving towards something resembling the letter U, with households increasingly spread across different economic circumstances.

Consider a Melbourne median house price of around $920,000, the illustrative figure Simon used in our discussion.

For a wealthy household purchasing in a prestigious established suburb, a $920,000 home may bear little resemblance to the properties they're considering.

For a lower-income household struggling to save a deposit, that same home may be completely beyond reach.

The median sits somewhere between two very different housing realities.

Of course, Australia's income distribution isn't literally a perfect U-shape, and we still have a substantial middle class. But Simon's broader observation is important.

And this matters enormously when we start talking about affordability.

Property prices and housing affordability are two different things

One of the biggest mistakes I see in discussions about Australia's housing crisis is the assumption that lower property prices automatically mean homes are more affordable.

There's certainly a relationship between prices and affordability, but affordability depends on much more than the purchase price.

As Simon pointed out, it also depends on your income, savings, borrowing capacity, mortgage interest rate and the ongoing costs of owning a home.

Consider two households purchasing exactly the same $900,000 property.

One has a substantial deposit, two secure professional incomes and relatively few financial commitments. The other has a smaller deposit, one modest income and significant living expenses.

The purchase price is identical, but their ability to afford the property is very different.

Interest rates make an equally dramatic difference.

A property that was comfortably affordable when mortgage rates were around 2% may become a considerable financial burden when rates approach 6%.

For example, on a $700,000 principal-and-interest mortgage over 30 years, repayments at 2% are approximately $2,587 per month.

At 6%, they rise to around $4,197.

That's an additional $1,610 every month, or more than $19,000 a year, without any change in the property's purchase price.

And that's before considering stamp duty, council rates, insurance, maintenance and, where applicable, owners corporation fees.

Simon also made an interesting observation about the lifetime cost of borrowing. At an interest rate of approximately 5.3%, a borrower with a 30-year principal-and-interest mortgage will repay roughly twice the original loan amount over the life of the loan, assuming the rate remains unchanged.

It's a reminder that the cost of finance can be just as important as the price of the property.

Then there's location.

A cheaper home on the outskirts of a capital city might appear more affordable than a smaller property closer to employment and essential services.

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However, once you include commuting costs, additional cars, parking and the time spent travelling, the household's overall financial position may look quite different.

Similarly, a property in a flood-prone area may have a lower purchase price but substantially higher insurance costs.

Why the price-to-income ratio doesn't tell the whole story either

Another commonly used measure of housing affordability is the ratio between median property prices and median household incomes.

It's easy to understand and allows researchers to compare housing costs across cities and countries.

If the median house costs ten times the median household income, the price-to-income ratio is ten.

And there's no doubt this measure has value, particularly when examining long-term trends.

But Simon cautions that it also has limitations.

It doesn't account for household savings, mortgage rates, lending requirements, taxes or differences in household composition.

Nor does it necessarily compare like with like.

A city dominated by detached family homes may have a very different housing market from one with a large proportion of apartments.

Comparing affordability today with affordability in the 1970s or 1980s introduces further complications because interest rates, workforce participation, household structures and lending practices have all changed.

That's one reason I believe the popular debate about whether Baby Boomers or Millennials had it harder when buying their first home often becomes unnecessarily simplistic.

Each generation has faced different challenges, and while today's first-home buyers undoubtedly confront substantial affordability pressures, a single ratio can't capture the full financial reality of either generation.

Simon summed it up neatly by suggesting we should take both median prices and price-to-income ratios with a grain of salt.

They're useful indicators, but they shouldn't be mistaken for complete explanations.

The property indicators serious investors should be watching

So, if median prices don't tell us everything we need to know, what should investors and homebuyers be watching?

At Metropole, we've always believed that understanding property markets requires looking beyond the headline figures, particularly during periods of uncertainty.

One of the first things I examine is the movement in prices for comparable properties.

Rather than asking what happened to Melbourne's median house price, I'd prefer to know what's happening to established family homes on good-sized blocks in a particular group of suburbs.

Are similar properties selling for more or less than they were six months ago? Are buyers competing for quality homes? Are vendors discounting their expectations?

Repeat-sales and hedonic price indices, such as those produced by Cotality, can provide a clearer picture of underlying price movements by comparing repeat transactions or accounting for differences in property characteristics.

But price movements are only part of the story.

I also pay close attention to asking prices, which can reveal changes in vendor expectations before they're reflected in settled sales. SQM Research publishes asking-price information that can help identify emerging trends at capital-city and suburb levels.

Loan approvals are another useful indicator because they provide insight into the number of buyers preparing to enter the market.

Then there are auction clearance rates, which give us a relatively immediate indication of how buyers and sellers are responding to current conditions.

Of course, no single weekend's clearance rate tells the whole story, particularly when auction volumes are low. But trends over several weeks can be revealing.

I also watch attendance at open-for-inspections, days on market and vendor discounting.

When inspection numbers increase, properties begin selling more quickly and vendors become less willing to negotiate, these can be early signs that demand is strengthening.

Simon suggested taking this analysis further by examining transaction volumes across different price brackets.

Are premium properties selling? Is activity concentrated at the affordable end? Are particular dwelling types attracting stronger demand?

These questions help explain what's happening beneath the headline numbers and whether apparent price movements reflect changing values or simply a different mix of transactions.

Demographics may be the most important indicator of all

While short-term market indicators help us understand where prices may be heading, demographics provides some of the most valuable insights into the longer-term future of our housing markets.

And naturally, Simon agrees.

As he explained, demographic trends help us understand how Australia's population is changing, where people are likely to live and what types of homes they'll need.

After all, property values are influenced by the relationship between supply and demand, and demand is shaped by people.

Their ages, incomes, household structures, employment opportunities and lifestyle preferences all influence the homes they're prepared and able to purchase or rent.

An ageing population creates different housing requirements from a suburb attracting young families, while an area experiencing strong growth in professional employment may develop very different demand from one dominated by lower-income households.

That's why investors need to understand the likely future population of the suburbs they're considering.

Simon reminded me that investors should think carefully about the people who will eventually live in their properties and whether those households will have the financial capacity to afford them.

He also reinforced a principle I've discussed for many years: successful property investment involves owning something people want and that is relatively scarce.

Of course, scarcity alone isn't enough. A property must appeal to a sufficiently large group of buyers and tenants with the financial capacity to pay for it.

But when genuine demand meets limited supply, the conditions for long-term capital growth become much more favourable.

Why property valuation remains part art and part science

There's one final consideration that even sophisticated property statistics struggle to capture.

Every property is different.

Two homes in the same street may have identical land sizes and similar floor plans, yet one could be substantially more valuable because of its orientation, views, natural light, condition or architectural appeal.

In some Sydney suburbs, properties on one side of a street enjoy magnificent harbour views, while those opposite look directly into the homes enjoying those views.

No suburb median can adequately capture that difference.

And while automated valuation models and artificial intelligence are becoming increasingly sophisticated, they still have limitations when assessing the emotional appeal and individual characteristics of a particular home.

Simon acknowledged that technology will continue improving, but understanding a property's appeal to future buyers still requires judgement and experience.

I agree.

Property valuation remains part science and part art.

The science involves analysing comparable sales, market trends, land values, demographics and economic conditions.

The art involves understanding why buyers will pay a premium for one property while overlooking another that appears similar on paper.

It's this combination of data, local knowledge and experience that helps investors make better decisions.

What does this mean for investors in today's market?

We're currently experiencing a difficult phase of the property cycle, with higher interest rates reducing borrowing capacity and confidence remaining subdued.

And while headlines about falling median prices will undoubtedly continue, it's important to recognise that different segments of the market are behaving very differently.

Some locations and property types will experience further price adjustments, while quality properties in desirable locations may hold their values relatively well.

This creates opportunities for investors with a long-term strategy, strong financial buffers and the patience to buy the right assets.

It may also be an opportune time for homeowners looking to upgrade, particularly if the price gap between their current home and the property they want has narrowed.

Of course, nobody can consistently pick the bottom of the market, and buying simply because a property appears cheaper than it was a year ago isn't a sound strategy.

But waiting until every headline turns positive can mean missing opportunities that emerge before the broader market recovers.

The bottom line

Median house prices will continue dominating property headlines because they're simple and easy to understand.

But as Simon  reminds us, Australia's housing market has become increasingly diverse, and a single statistic can never tell the whole story.

I've been investing through property cycles for around 50 years, and one thing I've learned is that some of the best opportunities emerge when uncertainty is high and confidence is low.

Successful investors understand that markets move in cycles, and they focus on buying quality assets in locations with strong underlying demand rather than reacting to short-term headlines.

So the next time you read that median house prices have risen or fallen, treat it as the starting point for your research rather than the conclusion.

Because understanding what the numbers actually mean is far more valuable than simply knowing what the numbers are.