CHAPTER 2 PURPOSE AND USES OF HOUSE PRICE INDEXES
WHAT THE ESTABLISHED HOUSE PRICE INDEX DOES
2.1 The objective of the HPI is to inform the community, policy makers and other users about price change of established houses in Australia. This is achieved by producing an accurate and timely measure of the contemporary rate of change in the prices of the stock of established houses, including the land component, in the eight capital cities. The national HPI is a weighted average of the indexes for the eight capital cities.
2.2 Price movements in the HPI are measured quarterly, however the index series allows for movements to be calculated across other time periods, such as annually. The level of the index in a particular period indicates the change in price of the stock of established houses from the index reference period, at which time the index was set to 100.0.
2.3 It is important to note that the capital city indexes measure price movements over time in each city individually; they do not measure differences in price levels between cities. Having a higher index level in one city compared with another simply means that the price change since the index reference period has been greater in the first city.
FACTORS THAT INFLUENCE CHANGES IN HOUSE PRICES
2.4 The rate of change of house prices differs across geographical locations, and is influenced by a range of factors present at a particular time. These factors include, but are not restricted to, supply and demand, income levels, desirability of location, supporting infrastructure, availability and affordability of credit, government levies and/or financial support, and demographic distribution.
2.5 While the HPI measures the effects of the multitude of influences on house prices, it cannot determine the contribution (or lack thereof) of particular factors.
USES OF HOUSE PRICE INDEXES
2.6 The HPI in its current form derives from an historical measure in the Consumer Price Index (described in Chapter 3) which was discontinued. This resulted in the publication of the HPI in its own right.
2.7 The principal use of HPIs is as economic indicators. There is a wide-spread interest in house prices, which are viewed as one measure of the wealth of a nation and the capacity of its citizens to participate in and contribute to economic growth.
2.8 The International Monetary Fund's 2006 publication Financial Soundness Indicators Compilation Guide notes, in the introduction to Chapter 9: Real Estate Price Indices, that it is important to maintain these measures in order to monitor exposure to risk.
'During an upswing in real estate prices, real estate may be used as collateral for extensions of credit for further purchases. But once conditions begin to reverse, such exposure can cause the downturns in economic activity, credit, and real estate prices to become mutually reinforcing.' (International Monetary Fund, 2006, p. 101).
2.9 Other uses of price indexes in the commercial realm include property valuations, forecasting, and measuring investment returns or risks.
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