Of all the myriad of housing market-related data in existence, almost undoubtedly it is measures of house price trends that are most-watched, most scrutinized and most discussed. Households who own homes want to see house values rise, those who want to own one in future want to see affordability, estate agents see rising home values as a marketing tool, while mortgage lenders who use the home as security don’t want to see values drop.
But what is a house price index? Some will be surprised to hear that it isn’t even a measure of average home values and/or their trends, but rather of average home transaction values and/or their trends, and the difference can be significant.
Average house price estimates are also not necessarily a good indicator of housing market “equilibrium” price, with the market sometimes drifting far away from equilibrium
And the compilation of house price indices presents a number of challenges. Changes in the characteristics of homes (as they get upgraded, altered or “downgraded”), and in the composition of the country’s property stock, over time mean that house price comparisons over time are not always comparing “apples with apples”.
During property cycles, FNB finds transaction “activity shifts” across market segments as the relative strength/weakness of market fluctuate, and this can distort our view of what we believe to be house price trends.
And then there are the data constraints, and having to choose between the larger Deeds data sample, which lacks in terms of various property details, versus FNB’s smaller data sample but one which has a high level of property detail and is the far more “current” data set.
At FNB, there are 4 different National House Price Indices, using 4 differing methodologies. They include a Median House Price Index, a simple “Mean” House Price Index, the FNB Repeat Sales Index and our FNB “official” House Price Index which we term a “fixed weight” methodology, whereby we fix the weights of a significant number of sub-segments with the aim of reducing the “distorting” impact of transaction volume shifts across segments.
Read more here: FNB Property Barometer_FNB_HPI_Methodologies_2_Aug_2016