Methodology: Please Explain

Property market economists, commentators and analysts around the country often debate on the best methodologies to use when it comes to providing their analysis on property markets. It sounds complicated but methodology can be explained in simple terms. Story by Cameron Kusher.

The popular RP Data-Rismark Home Value Index is calculated using a hedonic regression methodology that attempts to overcome the issue of compositional bias associated with median price measures. Put in simple terms, the index is calculated using recent sales data combined with information about the attributes of individual properties such as the number of bedrooms and bathrooms, land area and geographical context of the dwelling.By deconstructing a property into its constituent parts, a much more reliable and accurate representation of capital movements in property values can be calculated.

RP Data owns and maintains Australia’s largest property related database which includes transaction data for every home sale within every state and territory. This data is then augmented with recent sales advice from real estate industry professionals, listings information and attribute data collected from a variety of sources. The methodology has been created by joint venture partner Rismark International and independently audited by both the Securities Industry Research Centre of Asia-Pacific (“SIRCA”) and Moody’s Economy.com. Both of these independent parties have declared the methodology to be an improvement over the quality of existing measures of house price movements in Australia. For detailed methodological information please visit www.rpdata.com

Why are there different medians?
There are many reasons why there are different medians. The main reasons for differences in median prices are likely to be: medians may be based on a different time frame (monthly, quarter, half year, year) and the process of cleaning, filtering and classifying the data may also be different. Unfortunately there is no standard Australia wide for the provision of property data and as such what one data provider considers to be a ‘house’ may be slightly different to that which another considers a ‘house’ and the same goes for all other property types. At RP Data we have developed a methodology over many, many years for cleaning and filtering out data which is inaccurate and we are continually refining and trying to improve upon this methodology.

What methodology is used by RP Data?
RP Data uses a hedonic methodology which is different to most other data providers. The hedonic methodology uses attributes such as land size, number of bedrooms, number of bathrooms as well as a range of property attributes in order to determine the ‘value’ of a property if it were to sell as at a particular date. Other forms of indices use forms such as stratification or repeat sales to determine value (RP Data also has these indices available) however, they are not as reflective of true value because they rely only on that which has sold, not all product across a market.

What’s the value of looking at medians when researching for properties if there’s no universal gauge?
For someone looking to purchase a property, the actual use for a median is little; it just provides a benchmark of the middle value. If the specific property is higher or lower than the median it will provide some indication of the quality of that property but little else, of course any property purchase is generally a subjective thing. Looking at growth rates of medians does provide an indication of how the market has performed over time but this analysis is on a broad scale and not specific and should only be used as a guide. This is an inherent shortcoming of any index, for example the S&P ASX/200 is a measure of the performance of the Top 200 companies listed on the ASX, it doesn’t reflect each company individually and although the index value could be increasing, the value of shares in companies within that bundle of 200 could be falling or alternatively increasing at a much more rapid pace.

How should investors treat this information?
Investors should treat the information exactly as it is – a benchmark, a guide and nothing else. It provides an excellent wrap up on a macro level (national and capital city) but it tells you very little about the performance of individual properties. Use it to understand how the macro market is performing and then do your own research and analysis to determine what is occurring in your own market.

Is there a risk in comparing data from other providers i.e. Residex, APM, RP Data and REIA?
Not really, the only risk is getting confused as to why everyone has slightly different results. The ABS and APM use a stratified median but the ABS doesn’t look at units and townhouses (APM does). Residex uses a repeat sales methodology whilst the Real Estate Institute use median prices. All of these methodologies are very useful, however, they are reliant only on properties which have transacted during the recent period. Only the RP Data-Rismark Hedonic Index takes into consideration those properties which haven’t transacted as well as those which have.

What is best way for people to learn about data available to them and how to use it?
People should jump on to the website of each data provider and investigate what the methodology involves and how it is used to better understand why each index returns different results.

Cameron Kusher

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Cameron Kusher

Cameron Kusher is CoreLogic RP Data’s senior research analyst, specialising in primary and secondary data analysis, property market commentary and consultancy. Cameron has a thorough understanding of the fundamentals such as demographics, trends, economics and spacial analysis and is a regular keynote speaker for property-related groups, regulated industry bodies, corporations and the government sectors.