In 1990, house prices fell in most parts of Melbourne after several years of rapid price rises. But home ownership is more than a short-term proposition, and while house prices are often discussed in terms of affordability, the family home has received relatively little attention as a source of increase in a family's wealth.

In this context, did price increases simply reflect inflation or did families who were home owners and buyers gain in wealth through their home ownership? What has been the pattern of changes in house values in different parts of the city and what are the implications of this pattern? To examine these issues, this article draws on data on house prices for the period 1974 to 1990 in each local government area in the Melbourne Statistical District, and considers some of the effects of different rates of capital gains.

PROPERTY VALUES

The downturn in prices provides a useful reminder that buyers who have to sell (perhaps due to job loss or marital separation) may actually get less than they paid for their dwelling. Moreover, families buying in the 'wrong' areas (that is, getting less capital gains than others) find they have decreasing opportunities to purchase elsewhere. This can be called locational disadvantage as distinct from the disadvantages caused by low income.

In this discussion, a distinction is made between nominal price increases and changes in real values by adjusting for inflation. There are two major components of property values. The first is the perceived advantages of particular locations. Prices in any area may increase because of improved infrastructure (roads, other dwellings, shops, schools, parks and so on), or because of changed economic conditions (an economic upswing or a downturn in the stock market). Expectations that an area is a good place to buy into can also result in increases in land values.

The second component of property values reflect improvements (or lack of them) such as extensions, repairs, landscaping, made by the owner to the dwelling or garden. This should be distinguished from capital gains where value increases do not involve the owner's expenditure or effort. Unfortunately, data on improvements are not adequate to distinguish adequately between capital gains and the owner's improvements.

Data were provided to the Institute by the Victorian Valuer General's Office on average and median dwelling sales prices in each local government area for each year from 1974 to 1990. In overall dollar terms, there were substantial price increases in all areas over this period but some big differences between areas and years. Part of this increase would reflect the rising size and quality of new housing constructed over this period and improvements made by owners to their houses and gardens. It is not clear how far prices will fall in the current (third) period.

When some allowance is made for inflation (adjusted to 1990 dollars by the Consumer Price Index), the real increase in prices is very much less, and the whole period can be broadly divided into three: falling real prices in the period 1974 to 1982 or 1983, a sharp rise in the years 1984 to 1989, and a fall thereafter. In the first period, prices for the whole Melbourne area fell by 3.3 per cent per annum; in the second, they rose by 5.4 per cent per annum.

CAPITAL GAINS

The accompanying map displays the annual change in median dwelling prices for each municipality, calculated by a log linear regression for the period 1974 to 1990. This procedure smoothes out the short-term fluctuations of the property market, giving an annual 'average' price change. For the Melbourne area as a whole, dwelling prices (after allowing for inflation) rose by an average 1.4 per cent each year over the whole period.

After allowing for inflation and recognising that many owners have undertaken considerable expenditure on improvements, long-term capital gains on housing in many parts of Melbourne were negative or low over this period. The map suggests, however, that there are systematic differences between areas, with some having substantial long-term increases despite short-term fluctuations.

As illustrated, house prices in most of the outer suburbs rose less quickly than in middle and inner areas, although some of the outer suburbs had higher value increase than others. One possible explanation could be that these are the local government areas where buyers have a higher socio- economic status. (There are marked similarities to the analysis of economic characteristics of municipalities as covered in an article by the same authors in Family Matters No.28.) In these suburbs, not only is housing and amenity of better quality but also people may be consistently investing more in improving their houses, thus increasing the value of their own home and the attractiveness of the whole area.

LOCATIONAL DISADVANTAGE

While the differences in annual increases in the map may not seem large, they result in very unequal outcomes over a number of years. For example, a buyer in Malvern, an established, middle-class eastern suburb, in the last ten years gained more than $152,000 in 1990 dollars, as its exponential growth in property values since 1974 has been 5.2 per cent each year.

In Eltham, an affluent, rapidly growing suburb to the outer north- east of Melbourne, buyers gained $37,700 in the last ten years as the trend rate of real increases was 2.3 per cent per annum. By comparison, a family in Whittlesea, a semi-rural area on Melbourne's north-east outskirts, gained only $5373 from increased property values as growth was 0.5 per cent per annum.

In addition to implications for wealth inequality, rising relative prices in inner and middle suburbs mean that families buying on the fringe face an increasing financial barrier to selling their dwelling and buying closer in.

In 1990, for example, a family selling at Whittlesea would have had to spend approximately double the median price in order to buy a Malvern dwelling. By 2001, however, they would need to spend more than three times as much (if relative prices continue to diverge as they did between 1974 and 1990).

Similarly, in 1980 the median price in Pakenham, a semi- rural area to the south-east, was the same as in Collingwood, an inner suburb, so that relocation closer in was not a financial barrier. (Although such considerations as transfer costs and the quality and size of the median dwelling in each area must also be considered). After ten years, however, the median price in Collingwood was almost 30 per cent ($30,000) higher than in Pakenham.

In other words, the Pakenham family and others living in many of the outer and fringe suburbs are likely to face increasing difficulty if they want to move to other areas; in this respect, they can be considered locationally disadvantaged.

While capital gains may do nothing on a monthly basis to assist those making large mortgage payments relative to their incomes, in the longer term capital gains are a major determinant of wealth inequality and the cost of housing. For a family seeking sell their house because of separation, long-term unemployment or a wish to move closer to services, the level of capital gains on their dwelling can determine whether and where they can afford to buy.