Overview of the family of property price indices and their importance

1. Overview of the family of property price indices and their importance Lunchtime seminar: Measuring Property Prices, UNSC, New York Tuesday February 23. 2010 Olav Ljones Deputy Director General, Statistics Norway olj@ssb.no

2. 1. Introduction • We discuss statistics on dwellings (flats and houses) • Both new and old houses • Some are tenants and some live in owner occupied houses • Each dwelling is unique • The yearly turnover is small compared to all existing units • Market prices, assessment prices and taxes and fees. • Dwellings are expensive compared to yearly household revenue • Durable consumer good • Disitinction between the house price and the price of the service received

3. 2. Economic statistics and national accounts. • 1945 – 2010 From the core of the real economy to bubbles and financial markets. • Construction industry is a part of NA. The industrial classification gives activity (or process detail) but do not include a distinction between commercial buildings and dwellings. Two types of indices: Input price indices and Output price index (Hedonic) for new dwellings • Deflation indexes for the construction industries are based on input price indices and the price index for new detached houses • The dwellings are assumed to produce services to the household – both rented and owner occupied. • From user cost to the rental equivalent method based on observed rents. Common solution with CPI

4. 3. Sector Statistics - New Houses • Input price index; to describe the changes in cost components. Such indexes may be based on data for materials, manpower, plant and equipment, transport, energy and other cost. Such indices are often used to regulate construction contracts • Output price indices; producer price indices for the construction industry • need methods that corrects for changes in quality - like hedonic methods • Separate indices may be constructed for the different types of houses like detached houses, houses with several dwellings and multi dwelling houses.

5. 4. Used houses, residential property price indices (RPPI) • Data and proper statistical methods are challenges for these indices. • Hedonic methods or if available repeated sales (same house) are the methods that are most common • May be produced outside the family of official statistics, by private agents associations etc. • In Norway, the purchaser price and data about quality characteristics are from an internet market for houses (www.finn.no.) In addition we add complementally information about housing characteristics from the cadastre • The hedonic method is rather crude

6. 5. Cost of living and residential prices • The proportion of owner occupied houses • Durable consumer goods, 3 potential methods – acquisition, • user cost • rental equivalence imputes a price (value) on the service by using the corresponding market rental for a similar dwelling. House prices not included but indirectly rental price. • The international recommendations – not clear

7. 6. Inflation, monetary policy and house prices • Monetary policy with inflation targets • Target is defined based on the CPI • The forward looking perspective is interpreted in a way that has led Statistics Norway to publish a CPI adjusted for indirect taxes and energy prices • Active critical debate about what kind of inflation indicator that is the best. Alternative methods for inclusion of house prices are discussed.

8. 7. Household wealth, taxation • Housing stock will in most countries be an important part of the households wealth • Problem: How to measure the price – wealth? • Norway: Statistcis Norway give data/statistics input for a wealth calculator

9. 8. Financial stability and housing market • A strong link between house prices and financial stability. • Bubbles on housing markets will create shocks into the financial market when the bubbles burst • Statistics may be used for improved indiactors

10. 9. Independent indicators and non official statistics • Indices and information about changes in house prices may be produced outside the national statistical office • Sensitive area and important to follow accepted quality criteria

11. 10. Concluding remarks • The NSI has to take on board the several uses • Consistency through the full system of official statistics • Observation: A lack of a basic classification systems for houses, dwellings and quality criteria. How to measure the size of the dwelling and eventually how to include land (size). There will also be several possible definition of the price. A full program has to include the classifications and concepts.

12. Thank you for your attention