The profound influence of socio-economic factors on property prices can’t be overlooked in any comprehensive real estate analysis. Enter the Index of Relative Socio-Economic Advantage and Disadvantage (IRSAD), a tool developed by the Australian Bureau of Statistics to make sense of these multifaceted factors and their role across Australian communities.
Correlated with house prices, the IRSAD offers investors crucial insight into the socio-economic landscape of potential investment areas.
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How is the IRSAD Index Calculated and Why Does It Matter?
ABS calculates the index by comparing 25 variables that indicate the relative socio-economic advantage and disadvantage. The top 5 disadvantage variables are:
- percentage of low income earners
- level of education
- percentage of labourers
- dwellings with no internet connection
- unemployed people with children
For comparison, we list the top 5 IRSAD advantage indicators below in the order of significance:
- percentage of high income earners
- high value mortgages
- percentage of professionals & managers
- households with high rental expenses
- occupied dwellings with 4 or more bedrooms
The index can help property analysts understand what communities are well-off and which ones are not, by comparing IRSAD scores.
- A low IRSAD score indicates relative disadvantage and lack of comparative advantage overall. An area can have a low score if there are many households with meagre incomes, or people in unskilled occupations, and few households with high incomes.
- On the other hand, high scores indicate that an area has many households with high incomes or lots of people in skilled occupations, and few households with low income levels.
This index is not designed to only reflect the disadvantages but also show the advantages. ABS recommends to use this index when you might want to offset or counterbalance the disadvantages in a particular area with other advantages or benefits.
How Does IRSAD Relate to House Prices in Australia?
In order to make the comparison of areas easier, use IRSAD deciles (scale from 1 to 10) for ranking areas by their socio-economic status.
The index measures the extent to which an LGA or suburb is balanced in terms of socioeconomics factors. The chart below illustrates how house prices relate to IRSAD deciles.
The idea of affordable housing is usually associated with the notion of low income families. This is evident in the data, as we can see that prices for 1-2 deciles can be 3 times lower than the prices in the 9-10 range. There is a strong 0.62 positive correlation between the house prices and IRSAD.
Interestingly enough we found only a weak positive correlation of 0.16 between YoY price growth and IRSAD. This means that although areas with high IRSAD tend to be more expensive, the price growth in 2020-2021 has weak links to how well off the area is socio-economically.
However, areas with high IRSAD scores show better capital growth returns when benchmarked against longer periods. Areas with high IRSAD scores are ranking top of the list when it comes to compound capital growth in the last 10 years
Applying IRSAD Deciles for Property Market Research
IRSAD deciles can help you identify areas that have the socio-economic conditions conducive to property investment. Areas with high IRSAD deciles often indicate a more affluent resident base, higher income levels and lower levels of unemployment. These conditions could positively impact long-term property values, making these areas prime candidates for potential investment.
Lower IRSAD scores indicate areas with socio-economic disadvantages, such as lower income levels or higher unemployment rates. These areas may be more prone to property price volatility, especially in economic downturns. Therefore, IRSAD data can contribute to risk assessment in your property investment strategy.
Knowing the socio-economic status of an area could give investors the upper hand in negotiations. For example, properties in areas with lower IRSAD may have more room for negotiation on price due to lesser demand.
We have established that IRSAD correlates well with long-term capital growth returns. If your investment strategy goals are long-term i.e. 5 years or more, than you should definitely take IRSAD into consideration.
Pay attention to suburbs will low IRSAD decile scores in the 1-2 range. These markets are less likely to yield high capital growth in the long-term.
It’s important to note that while the IRSAD is an insightful tool, it should not be solely relied upon to make investment decisions. Always consider it in tandem with other measures like supply and demand metrics and other relevant demographic data. A holistic approach to property market research is key to successful property investing.
Conclusion: The Key to Understanding the IRSAD Benefits
While the IRSAD index offers important insights, it should be viewed as one component of broader real estate analysis rather than a standalone predictive tool. High IRSAD scores often signal a wealthier population with better education and life quality but always come with exceptions, particularly when applied to property markets.
We should be aware of the limitations of the IRSAD and its use cases. We need to think of it not as a predictive variable but one of the many indicators to take into account when researching a property market.
Although higher IRSAD scores ratings are often associated with more money, better education, higher quality of life, there are always exceptions to the rule, especially when applied to property markets.
For example, there are areas with high IRSAD scores that are not good candidates for property investment due to other unfavourable indicators. And vice versa, some areas with IRSAD scores in the 2-5 range show signs of promise in the long-term.
Have you ever incorporated the IRSAD metrics in your past investment decisions? We’d love to hear your experiences and perspectives on using IRSAD for property investing in the comments section below.