CHAPTER 3 HISTORICAL BACKGROUND


INITIAL HOUSE PRICE MEASURES

3.1 The HPI was originally designed to meet the specific data requirements for the construction of a price measure for mortgage interest charges, which were included in the Consumer Price Index (CPI) from 1986 to 1998. The pricing point used was the date of final settlement of the house purchase as that was the time at which mortgage interest started to be charged. The weighting patterns appropriate for mortgage interest charges were housing finance commitments. House prices were obtained from a range of sources, with varying coverage within each of the eight capital cities. The main sources of data were the State/Territory(footnote 1) Land Titles Office or Valuers-General (VGs) Office, or equivalent(footnote 2) , and the State Real Estate Institutes.

3.2 When mortgage interest was removed from the CPI in 1998 as part of the 13th Series CPI Review, the ABS continued to publish the price index of established houses because of user interest in the series. This time series is available in Table 10 of House Price Indexes: Eight Capital Cities (cat. no. 6416.0) on the ABS website <www.abs.gov.au>. The series commences in June quarter 1986 and concludes in June quarter 2005.


SUBSEQUENT DEVELOPMENTS

3.3 The current series of the HPI is the product of two reviews, the first in 2004 significantly changed the methodology, and the second in 2007 provided some further refinements.

3.4 The HPI in its current form was first published for the September quarter 2005, with the series backdated to March quarter 2002. In the December quarter 2008 issue, updated weights and a refined stratification method were introduced and linked to the existing series at March quarter 2008.

3.5 The original series is published for historical purposes for users who may be interested in an indicator of established house price movements over a longer period than is available using the current methodology. Note that because of the different methodologies used to calculate this historical series and the current HPI series, it is recommended that caution be exercised when the historical series is used as a proxy for back-casting (or linking to) the current HPI series for periods prior to March quarter 2002 (see Chapters 10 and 12 for further information).


2004 REVIEW

3.6 The ABS commenced a review of the HPI in 2004. The objectives of the review were to:

• determine specific user requirements for an updated HPI;
• identify possible data sources that were consistent and comprehensive;
• assess the costs and the strengths and weaknesses of these alternative data sources; and
• develop a strategy to deliver an improved HPI.

3.7 Four important aspects of the data series were identified as needing to be changed or improved:

• the timeliness of the HPI release - to be closer to the reference quarter;
• the time at which prices are recorded - from settlement date to the date of exchange of contracts;
• the effects of changes in the composition of sales - to be reduced; and
• the coverage of the index - to include ‘other dwellings’ (townhouses, units and apartments), and dwellings covering the regions in each State outside the capital cities.

3.8 The need to re-examine the weighting methodology of the index was not explicitly identified in the review, but was undertaken as part of the ABS' established index review strategy.

3.9 As a result of the implementation of the review recommendations, the HPI is now released closer to the reference quarter. The time at which prices are recorded (the pricing point) has been changed to the date of exchange of contracts, and the effects of compositional change have been reduced through an improved stratification method. The underlying weights in the index were updated to reflect stock weights, based on the latest Census house count data available.

3.10 The ABS decided to concentrate initially on improving the index for detached houses only. The aim of developing new indexes for other residential dwellings (units, townhouses, apartments etc.) was viewed as a longer term objective. Likewise, the ABS decided it could not yet move towards producing rest of state HPIs each quarter.

3.11 A number of users also expressed a strong desire for the ABS to release average prices (mean and/or median) for each city in addition to the price index. The ABS feels that it is not possible to publish stratified price level measures that will be meaningful. However, unstratified or 'raw' measures of median house prices have been made available. In addition, the number of established houses transacted in each city each quarter is available. These results are published in Tables 7 and 8 of 6416.0, and are revised each quarter as necessary as additional data are acquired.

3.12 The September quarter 2005 issue of 6416.0 was the first to incorporate the changes outlined above. For a more detailed discussion on the outcomes of this review, refer to Information Paper: Renovating the Established House Price Index (cat. no. 6417.0).


2007 REVIEW

3.13 A second review of the HPI commenced in 2007. As a result, the method of stratification used to compile the index was refined and the housing stock weights were updated using quantity data from the 2006 Census of Population and Housing (the most recent Census). These changes were introduced in the December quarter 2008 issue of 6416.0.

3.14 Details of the concepts, sources and methods underlying the compilation of the current HPI series are described in the following chapters.


FUTURE DEVELOPMENTS

3.15 The current weights, based on the 2006 Census, will be updated once data become available from the 2011 Census. At that time the ABS will also assess the performance of the stratification method. In addition, the ABS will investigate ways to update the weighting between Census collections: besides ensuring that weights keep up to date with changes in the stock of houses (such as development of new suburbs), it would also provide a more frequent opportunity to implement improvements in stratification.

3.16 The ABS is also planning to address one improvement identified by the 2004 review which has not yet been acted upon: that the coverage of the index be expanded to include "other dwellings". The aim of providing rest of state indexes remains a longer term objective. For the immediate future, geographic scope continues to be restricted to the eight capital cities, and calculation of a weighted average.

1 State/Territory is referred to as 'State' for the remainder of this publication. <back
2 These data sources are referred to as 'VGs' for the remainder of this publication. <back