RP Data along with our strategic partners Rismark International released two world firsts this week;
- the world’s first genuine “daily” house price index suite, which will cover all the major cities and the national market.
- the world’s first house price indices that track the change in the value of the overall asset class rather than simply tracking changes in the performance of just those properties that transact.
Obviously this is a new way to measure housing markets and as such there are a lot of questions around how we can produce such a high frequency / low volatility measure which is just one day in arrears. The points below explain how the index is calculated and how we, together with Rismark International, produce the most timely home value index ever.
- The methodology used is an improvement on our existing hedonic methodology. It provides a more accurate measure of the housing market by utilising what is known as a hedonic imputation methodology (the previous methodology was an adjacent period hedonic calculation). Although these measures are both calculated using a hedonic regression methodology there are significant fundamental differences on how the results are calculated.
- The hedonic method allows us to understanding the value associated with each attribute of a property (ie, land area, living area, bedrooms, bathroom, location, view, car parks, etc.) we observe selling. As such we can then ‘impute’ the value of dwellings with a given set of known characteristics for which there is no recent sales price by observing the characteristics and sales prices of other dwellings which have recently transacted. It then follows that changes in the market value of all residential property comprising an index can be accurately tracked through time.
- The most important difference is that the new methodology is calculated based on the entire housing market, not just those properties that transacted over the reporting period. Previously we would bundle all the transaction data we had collected over a month and calculate the index results using data from only those homes that had transacted in the period. We previously did this by observing only sold properties in a given month and used the hedonic method to separate price changes associated with the differences in the composition of the various properties trading month to month from those changes associated with variation in the underlying residential property market value. Whereas, the new imputation method ‘imputes’ the value of all properties utilizing all know data up to the date of calculation
- The annual volatility measurement of the new imputation based index is about the same as the previous adjacent period measurement. Thanks to the daily frequency, for the first time ever we can now see intra-month movements of dwelling values.
- The ‘new’ index imputes the value of every Australian home each day taking into consideration every single data point we knew about the housing market at the point in time of calculation. Factors such as lot size, the number of bedrooms and bathrooms, car spaces and whether the home has a swimming pool or view are some of the hedonic attributes factored into the analysis. Based on a flow of around 1,400 new transactions received each day as well as a constant flow of new attribute data our most accurate view of the imputed value of the property market is updated each day.
- Unlike the previous methodology, the new imputation methodology does not get revised. Because the index is calculated using every data point available on the day, each day the index value updates it is incorporating the full set of attribute and transaction data available. Time variables are applied such that less recent sale information is benchmarked up to today using our knowledge of the most recent sales. While the most recent sales have the greatest influence on the change in the index, all of the information received on a given day (include sales we’ve just learned about which may have occurred a few weeks ago) is important in calculating the daily value. An important requirement of the design of the index and its subsequent audit, was that the index be an accurate reflection of current market conditions.
- The daily index which is being published is not seasonally adjusted. Given that the Index has been designed to be tradeable (more on this below), the absolute change in dwelling values is the preferred measure. We are currently undertaking a review of the seasonal adjustment method used. A seasonally adjusted series will be available to our subscribers and we will be publishing a seasonally adjusted analytical series within our monthly summary in the coming months once our review is complete.
- The index is designed for high frequency publication to facilitate trading liquidity. The Australian Securities Exchange (ASX) is a partner in this project and their intention is to build tradeable products from this Index. Note that these products are not yet available and will be subject to regulatory approval. The daily updates are available at both the ASX web site and at www.rpdata.com.
- The daily index is only able to be produced due to RP Data’s enormous investment in aggregating and collecting data and with a significant investment in processing infrastructure. RP Data spends more than $10 million dollars each year on data collection. The production of the indices each day takes approximately eight hours of processing time overnight on very fast servers. Imputing a value of every Australian property and calculating the change in those values overnight simply wasn’t possible several years ago.
- Unlike any other house price indices that are commercially available, our Index has been independently audited by both Alex Frino and KPMG. Additionally the technical papers can be viewed here.
Please post any further questions you have and we will endeavour to answer any further questions.