2. A dependable and accurate house price index is an important tool. High changes in house prices (either up or down) can have a significant impact on consumers, businesses and government. As sales volumes in many areas in Australia fall, the sample sizes used to calculate median prices is reduced. In most markets, house prices are skewed. The mean is often much further out in a long tail than is the median. There are often many moderately priced houses and very few expensive mansions. The few expensive houses pull the mean up but generally will not affect the median. One of the key problems with using the median price is the heterogeneous nature of housing markets. If we try and collect a larger sample by expanding our radius too far, we may collect prices from vastly different markets or sub-markets. It is important to look at the area that the median represents (e.g. suburb level) as well as the total number of sales used to collect the figures. The Repeat Sales Method is widely used around the world. It only looks at properties that have sold twice, which helps control for the differences in housing stocks. It looks at price changes rather than prices themselves and is generally accepted as least effected by reductions in sample sizes. Hedonic regression methods are also used, which leverage the quantitative characteristics of properties sold. Property sales must have accurate attributes to enter the model and as with the median method, can be subject to problems if sample sizes are too small. These models do not adequately control for the actual quality differences between properties. If all of the houses sold have been renovated and no expense spared, this can artificially inflate the index result. However a simple and easy to use solution is available – Retrospective Valuations. The Retrospective Valuation Method (RVM) uses two valuations of the same property, adjusted for quality in both periods. In simple terms, you take a house and value it now, then revalue it an earlier date. For the method to work, a solution must be used that allows for quality adjustments between the comparable sales and for retrospective dates. For home-owners, lenders or real-estate professionals, this method allows a sub-market to be better analysed. For example, if the subject property is recently renovated, it can be valued as a renovated property in the second period and un-renovated in the first period, controlling fully for changes in quality. Kent Lardner [email_address] Methods of measuring housing price changes
3. Estimate date 10/12/2008 By using the attributes and address, we locate similar matching properties in the local area that have sold within the last 12 months. By adjusting for the quality differences, we arrive at a price estimate of $1, 417,864. Example 1 – Current price estimate
4. Estimate date 10/12/2007 By entering a date 12 months prior, another estimate can be generated instantly. By adjusting for the quality differences, we arrive at a price estimate of $1, 659,034. Comparing the two prices shows a drop of 15% since this time last year for this property type in this specific location. Example 2 – Retrospective price estimate
5. Suburb median year-on-year Suburb median aggregated at a yearly level We can see that by aggregating at a yearly level, the median is calculated as a 3.5% increase.
6. Suburb median quarter-on-quarter Median quarter-on-quarter The change between Q4 2007 and Q4 2008 is – 22%. The total sample for Q4 is rather small and may change as lags in data enter the sample .
7. Comparison of results When using the median to estimate market growth, the aggregation period and total sales can have a significant impact on the result. Using quarterly aggregation periods and comparing this year to last year, the data indicates a fall of 22%. However the total number of sales in the sample for Q4 2008 is only 12, highlighting the risk of using smaller samples. The repeat valuation of this particular property indicates a fall of approximately 15% since this time last year. It may be fair to assume this is the result of the price (more than $1.5 million) which appears to be impacted by current economic conditions. Using the same method for lower priced houses in Balmain (lower than $1 million) shows changes as low as minus 2%.
8. Try PriceFinder on your own house today Members of the Australian mortgage and real estate industry are invited to test PriceFinder on their own homes for free. Simply click on the link below. Try it for yourself