The fundamentals of house price information
Thought I would share this post from Christopher Joye where he explains how you can discriminate between the different house price measures that are available in the market. A pretty fundamental thing to understand if you are interested in working out capital growth rates...
Obviously Joye has a vested interest in RP Data-Rismark so you have to keep that in mind when reading his post.
In the post he explains:
- the key difference between the five house price information providers in Australia - RP Data-Rismark, the ABS, Australian Property Monitors (APM), Residex and the state based Real Estate Institutes
- what a hedonic index is and why it is considered the most accurate way of house price measurement
- how property investors should treat these data
- how the RBA uses the different data
- why there are different median house prices stated and which one is correct
There are three key differences between all the providers. 1) the data they collect, 2) the data they actually use and 3) the accuracy/complexity of the index methodology they rely on. Below is a quick summary of the differences:
- Real Estate Institute (REI). These indices are based on simple ‘median prices’, which are crude and quite unreliable (the RBA and the Treasury have recommended against using this benchmark). A median price index ranks all sales from high to low and plucks out the middle or 50th percentile observation. The REI indies are normally reported quarterly;
- Australian Bureau of Statistics. The ABS reports a ‘stratified median price method’. Although the ABS measure is still a median price index, the stratification technique was created to help mitigate some of the severe 'compositional bias' shortcomings associated with simple medians such as those reported by REIs. Note that the ABS disseminates medians that cover only detached houses in capital cities. It doesn't cover units and other attached housing.
- Australian Property Monitors. APM also publishes a stratified median price method. APM report quarterly and reports medians relating to all property types in capital cities dissected according to houses and units.
- Residex. Use a ‘repeat sales’ method that is understood to be similar to the Case-Shiller technique published by S&P in the US. A repeat-sales index only examines purchases and sales of the same properties over time.
- RP Data-Rismark. They produce all of the above methodologies (including the Yale derivation). Their preferred benchmark though is the hedonic index. In total, RP Data-Rismark privately compute up to 15 alternative index measures, including several median and stratified median price indices, four repeat-sales constructs, and a number of hedonic benchmarks. They are the only provider that publish medians that cover all property types in all regions (ie, not just capital cities). This is important since around 40% of all homes are not located in the capitals.