USE AND PURPOSE OF PROPERTY PRICE INDEXES

INTRODUCTION

2.1 There are several possible conceptual approaches to compiling residential property price indexes. The approach chosen depends on the purpose and use of the indexes.

2.2 The uses of residential property price indexes 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 The methodology used to compile the ABS RPPIs is a stratification approach (footnote 1) . The data source is all Australian residential property sales data which are supplied to the ABS by CoreLogic (footnote 2). This dataset is a combination of residential property sales data obtained from State and Territory Land Titles Office or Valuer General Offices in each capital city (collectively known as the VGs) and real estate agents data provided to CoreLogic. The ABS applies classifications to this dataset to create the residential property sales dataset from which the price indexes and related statistics are produced.


USES

2.4 The ABS RPPIs stratify dwelling transactions by dwelling type, long term median price and SEIFA (footnote 3). 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. Other characteristics include the number of bedrooms, bathrooms and land size. These variables are not used to stratify the dwelling transactions in the ABS RPPIs.

2.5 For the purpose of a macroeconomic indicator of house price inflation a pure price index is needed. 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.

2.6 In the case of a residential property price index, producing a pure price index requires the removal of quality changes of individual dwellings. To do this a range of characteristics of individual dwellings should be held constant, for example the number of bathrooms and bedrooms. A residential property pure price index provides a measure of the change in price which is not due to changes in any of the characteristics of the dwelling. The ABS stratification method controls for quality by holding some price determining characteristics of dwellings constant. This produces RPPIs which are reasonable measures of pure price change. The ABS stratification method also controls for compositional change.

2.7 A key purpose of the RPPIs is to support the compilation of the non-financial assets component of the Household Balance Sheet in the Australian System of National Accounts. The ABS produces household balance sheets on a quarterly basis. These quarterly estimates allow the analysis of short-term changes in household wealth.

2.8 The most significant component of the non-financial assets owned by households is the value of dwellings. The price of dwellings is a key input to valuing the dwelling stock. The dataset used to produce the RPPIs is used to compile an estimate of the average price of dwellings to calculate the value of the dwelling stock. In the most recent period the average price is not considered reliable due to data availability constraints, so the RPPIs are used to calculate a reasonable substitute for the average price (footnote 4).

2.9 Ideally, the prices used to value the dwelling stock should reflect the price of the property whether it is the result of a change in the characteristics of the dwelling or not. However, the RPPI provides a reasonable approximation for use in the most recent period.


PURPOSE

2.10 The Australian Residential Property Price Indexes measure price change of the stock of dwellings over time. Consistent with the uses outlined above, the ABS RPPIs 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).


Footnotes:
1 This approach is explained in subsequent sections. <back
2 See Appendix CoreLogic Disclaimer and copyright notices from the Residential Property Price Indexes: Eight Capital Cities, Dec 2018 (cat. no. 6416.0). <back
3 See Census of Population and Housing: Socio-Economic Indexes for Areas (SEIFA), Australia, 2016 (cat. no. 2033.0.55.001), <back
4 Further details are provided in subsequent sections to describe the methodology used to produce the RPPIs and the methodology used to compile the TVDS. <back