Understanding the house price index for property investors

Statistics and reports are useful in making investment decisions – understand complex data and use it to your advantage

A house price index tracks the rise and fall of property values. Buyers’ agents use this information to help you select a suburb or region to invest in. The historical performance of real estate in a particular location may also be used to assist you in understanding the potential investment growth of a specific property.

There are a number of methods that can be used to calculate price indices for housing. 

Traditionally, unsophisticated indices based on median prices were common. The Australian Bureau of Statistics continues to maintain a ‘raw’ median house price index for 8 capital cities in Australia.

A median house price index does not assess the characteristics of sold properties. The index is skewed if homes sold in one measurement period have different attributes to those sold in the next. This and other flaws have led to the development of more accurate ‘quality adjusted’ models such as repeat sales and hedonic indices, which are well understood by professional buyers’ agents.

While the major indices in the US employ a repeat sales approach, excluding data for all properties that have only transferred ownership once, other developed economies generally prefer the hedonic method.

Hedonic indices use benchmarking data such as the number of bedrooms, size of land and a variety of other factors to more accurately assess changes to property values in a certain market. While there is not yet a single accepted calculation for producing a hedonic index, significant progress has been made by economists in the past five years to improve the reliability of these measurements.

The leading index for monitoring change in property values in Australia is the RP Data-Rismark Daily Home Value Index; made available in 2012 as the world’s first tradable hedonic home price index to be calculated daily.

According to Ben Skilbeck, CEO of Rismark International “The daily index… …removes bias associated with capital injections such as those arising because of renovations, alterations and additions so as to examine true changes in market value.”

To protect your investment against a dip in residential property values, you may choose to invest in the RP Data-Rismark Daily Home Value Index on the Australian Stock Exchange. A professional financial planner can offer guidance regarding strategies to reduce your financial risk.

With Australia at the leading edge of development for hedonic house price indices, buyers’ agents in our key property markets are well placed to help you understand the factors that influence the value of properties in your area and navigate the plethora of complex house price information available to you.

About the Author: Kristin is a freelance writer and property investor from Brisbane, Australia. You can view Kristin's other projects or contact her at LinkedIn or Google+. If you have any topics that you would like to see covered on this blog, please email blog at buyersagentguide.com.au

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