The Index of Relative Socio-Economic Advantage and Disadvantage (IRSAD) is a geographical index published by the Australian Bureau of Statistics that ranks areas in Australia by socio-economic factors. It is based on the ABS Census of Population and Housing, Australian Statistical Geography Standard (ASGS) and ABS Socio-Economic Indexes for Areas.
In this article we explore how IRSAD relates to house prices in Australia.
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.
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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.
Suburbs with higher IRSAD scores have higher house prices and lower housing affordability.HtAG Analytics
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
How to Apply the Deciles when Researching a Property Market
It is important to research a property market before buying a home or an investment property. This will help you understand what to expect and what the risks are.
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.
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Conclusion: The Key to Understanding the IRSAD Benefits
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.
As the IRSAD is based on the 2016 census data, scores in some areas may have moved up or down since then. We suggest to allow for plus/minus 1 decile when evaluating a property market via this metric.
Have you used the IRSAD metric in the past? Have you been able to successfully apply this metric to property investing? Share your thoughts in the comment section below.