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6416.0.55.002 - Information Paper: Forthcoming changes to House Price Indexes: Eight Capital Cities, 2013  
Latest ISSUE Released at 11:30 AM (CANBERRA TIME) 24/09/2013  First Issue
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CHAPTER 2 PURPOSE OF THE RESIDENTIAL PROPERTY PRICE INDEXES


OVERVIEW

2.1 There are several possible conceptual approaches to compiling residential property price indexes (RPPIs).

2.2 The uses of RPPIs include:

  • a macroeconomic indicator of residential property price inflation;
  • monetary policy and inflation targeting;
  • an input into estimating the value of housing as a component of wealth in the National Accounts; and
  • an input into an individual citizen's decision making.

2.3 For many years the ABS has compiled a House Price Index (HPI). The data source for this index is the State and Territories Land Titles Office or Valuers-General Office (collectively referred to as VGs for the rest of this paper) and the methodology used is a stratification approach(footnote 1) . The scope of the HPI is 'detached dwellings in capital cities'.

2.4 The main purpose of the HPI has been as a macroeconomic indicator of residential property price inflation.


EVALUATION

2.5 An opportunity to review the purpose of the HPI occurred as part of the ABS program to enhance macroeconomic statistics in Australia(footnote 2) .

2.6 The ABS considered the various purposes of compiling house price statistics and determined that the future suite of RPPIs(footnote 3) will serve the dual purpose of:
      (a) a macroeconomic indicator of residential property price inflation; and
      (b) supporting the compilation of the non-financial assets component of the Household Balance Sheet in the Australian System of National Accounts (ASNA).

2.7 International literature focuses on the compilation of a pure price index. A pure price index is compiled by pricing the same product(s) over time and by removing quality from the price change as it occurs.

2.8 In the case of an RPPI, producing a pure price index requires the removal of quality changes of individual dwellings. To do this requires the identification of a range of characteristics of individual dwellings, for example the number of bathrooms and number of bedrooms. A pure price index requires significant resources to compile. A pure price index provides a measure of the change in price which is not due to changes in any of the characteristics of the house.

2.9 A pure price index is suitable for some purposes and not for others. For example, if an index is to be useful in the estimation of the value of stocks of housing, the index should reflect the price of the property whether it is the result of a change in the characteristics (a quality change) or a pure price change.

2.10 The ABS RPPIs stratify dwelling transactions by dwelling type, long term median price and SEIFA(footnote 4) . Similar dwellings (not exactly the same dwellings) are priced each period and changes in other characteristics of the dwelling stock are not removed from the price index. To produce a pure price index, additional variables including number of bedrooms, bathrooms and land size would need to be used to stratify the dwelling transactions. The ABS RPPIs are useful for many analytical purposes, including as a macroeconomic indicator of residential property price inflation.

2.11 The price of residential dwellings is also an important input used to compile wealth statistics.

2.12 At present the ABS produces household balance sheets on an annual basis only. Consequently, analysis of short-term changes in household wealth is constrained.

2.13 A barrier to the production of timely, quarterly balance sheets has been the lack of high quality quarterly estimates of non-financial assets owned by households. The financial assets are available quarterly in the Financial Accounts produced by the ABS. The total value of the dwelling stock is the most significant component of non-financial assets owned by households.

2.14 The price of residential dwellings is a key input to valuing the dwelling stock. The dataset used to produce the RPPIs is also used to compile a high quality quarterly estimate of the dwelling stock. The ABS has obtained data back to 2003 from each of the VGs on all residential properties bought and sold in Australia.

2.15 The ABS has developed a method to produce the total value of the dwelling stock (TVDS(footnote 5) ) on a quarterly basis. The RPPIs play a crucial role in the quarterly production of the TVDS. A key purpose of the RPPIs is therefore to support the compilation of the non-financial assets component of the Household Balance Sheet in the Australian System of National Accounts.

2.16 Further details are provided in subsequent chapters to outline the expanded scope and methodology used to produce the RPPIs and the methodology to compile the TVDS.


SUMMARY

2.17 The ABS has considered the various purposes of compiling house price statistics and determined that the future suite of RPPIs will serve the dual purpose of:
      (a) a macroeconomic indicator of residential property price inflation; and
      (b) supporting the compilation of the non-financial assets component of the Household Balance Sheet in the Australian System of National Accounts (ASNA).




1 The stratification approach is explained in paragraphs 3.13 to 3.16. <back
2 The ABS received New Policy Proposal (NPP) funding in 2011-12 to enhance macroeconomic statistics in Australia. <back
3 See subsequent chapters for details of the expanded scope and methodology used to produce the RPPIs. <back
4 SEIFA is defined in paragraph 3.24. <back
5 Information about the TVDS can be found in chapter 4. <back

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