The author has been described by News Ltd as an "iconoclast", "Svengali", a pollie's "economist muse", and "pungently accurate". Fairfax says he is a "Renaissance man" and "one of Australia’s most respected analysts." Stephen Koukoulas concludes that he is "85% right", and "would make a great Opposition leader." Terry McCrann claims the author thinks "‘nuance’ is a trendy village in the south of France", but can be "scintillating" when he thinks "clearly". The ACTU reckons he’s "an enigma wrapped in a Bloomberg terminal, wrapped in some apparently well-honed abs."

Wednesday, July 4, 2012

House price indices for dummies (redux)

Back in 2010 I published a user-friendly guide on the different house price indices that are available in the market. If you are interested in this subject, you can read it here. Earlier in the year RP Data and Rismark International launched a substantially upgraded "daily" house price index methodology.

The new daily index was designed by a team of PhD-qualified mathematicians and statisticians over a period of three years. It represents an enormous improvement in the quality of housing information in this country by overcoming some important problems that plague traditional house price benchmarks. The project involved independent audits and active consultation with leading economic authorities, such as the Reserve Bank of Australia, and respected academic experts.You can read more about the daily index here.

If you ever hear criticisms of this index (I've only come across one myself), it is useful to first ask yourself these questions: is the critic a would-be competitor of RP Data's; what are their academic and research qualifications; do they produce a house price index of their own; if not, why not; and on what technical and empirical basis are they basing their criticisms; for example, what specific aspects of the research method do they disagree with?

For those that don't know, RP Data is Australia's largest real estate data company, with over 330 professional staff. It was valued at around $200 million prior to its acquisition by Core Logic Inc. RP Data's databases include over 150 million property data records that cover 99% of all homes. And it spends more than $10 million collecting and refining data.

The RP Data-Rismark index is based on all home sales executed in the regions it covers. You can read about the index method in the research papers that are available on RP Data's web site, along with the independent reviews of the index by academic experts and the accounting firm, KPMG.

RP Data-Rismark's index is used and relied upon by the RBA, Treasury, federal and state housing authorities, and most Australian banks. It is frequently referenced in RBA publications, and covered monthly by market economists.

After a competitive tender process, RP Data-Rismark's new daily index was selected by the Australian Stock Exchange (ASX) as its exclusive housing benchmark for the purposes of trading future financial contracts.

Every sales data point available to RP Data at the time of the index's calculation is taken into account, including past sales that have time variables applied. The RP Data-Rismark index gets the benefit of, on average, 1,500 new home sales each day, and ultimately has access to 99% of all sales transacted in the regions that it covers.

The volatility of the 8 capital city daily index is actually very low at around 5-6% per annum. People often confuse the high-frequency insights afforded by the daily index with higher volatility, which is incorrect. It is a common mistake.

One final comment. In contrast to some claims, auction clearance rates have improved from their low points of last year. They have stabilised around the 55-60% mark across Sydney and Melbourne compared to weaker levels in 2011. Total listing numbers are now also well below their peaks from last November, implying that effective supply levels are tightening, rather than expanding as has been suggested in some quarters.