RP Data-Rismark’s defence of the daily hedonic home value index

Louis Christopher of SQM states:

“ [RP Data-Rismark’s] daily hedonic index, for which these claims are based on, is an unreliable index as it is based on a miniscule proportion of actual sales that happen on a daily basis. Effectively on a day to day basis, the index misses out on over 95% of sales. And since it is an unrevised index, it means those missing sales are never taken into account.”

RP Data-Rismark response:

The above statement is categorically incorrect.

The RP Data-Rismark index uses ALL available sales information. Yes all, not just for the current day, but also all historical data. The index then produces the best estimate of the current state of the market from this data. Where sales data is not received the day of contract exchange, it is not ignored or unutilised. It is used in statistical and mathematical methods to account for the timing difference between the sale date and the date we receive the information. If we receive information about a sale one week after it has occurred, we use that sale to update our current view of the market, mathematically taking into account that the sale occurred one week ago. The information in that sale is still very much relevant to determining the current state of the market and our models therefore incorporate it.

In SQM’s newsletter earlier this week the index was criticised because of an example of where it was claimed the index fell by 1% on a given day. The fact is that the index change was 0.99/630.64, a decline of only 0.16%.

SQM Research claims that because the Melbourne index fell after a February rise that this is evidence that the increase in February must have not been correct. This claim is also wrong. Markets do not follow a straight point to point trajectory in any direction. They do, however, demonstrate natural volatility and seasonality as they traverse their path. Prior to the daily RP Data-Rismark index, these daily market movements were not observable in the Australian residential property market. A movement of 1% or 2% over the course of a month is negligible when compared with the movement in the stock market over a similar period. For example, even in a market that is declining it is possible to find periods where it is possible to have traded in and out at a profit.

Although the index provides a daily measure of the performance of the housing market, SQM Research fails to adequately acknowledge the following:

•             The small number of sales on one day doesn’t conclusively reveal how much the whole market has changed in value. A house that sold yesterday has almost as much relevant information as a house that sold today.  The time lag of previous sales is taken into account statistically via the hedonic imputation method. It gives us the best estimate of the value of our market portfolio, based on all the available historic information. 

•             We record all available sales and use them as the data arrives in our database. We use statistical methods to account for the timing difference between the sale date and the date we receive the information. If we receive information about a sale one week after it has occurred, we use that sale data to update our current view of the market, mathematically taking into account that the sale occurred one week ago. Over time, our indices self-update to reflect all available information, rather than publishing revised indices on a regular basis.

•             The index will react to changes in the market when it receives sales information showing sufficient numbers of sale prices higher or lower than those expected by the previous day’s model. It cannot react until given this information because it will have no evidence to do so.

•             The indices give the best estimate of the value of a diversified investment portfolio, using all the information available at the time of publication. Each day this information is updated on average by 1,400 transactions, which in turn inform the next day’s best estimate.

RP Data and Rismark are the only housing market index providers to have commissioned independent audits of our methodologies.  The results of these assessments can be viewed on the RP Data website.

Additionally, white papers detailing the index construction and methodology are also available at the same link.

As Christopher Joye has pointed out in a recent article the RP Data-Rismark indices are regularly referenced by the Reserve Bank of Australia as well as other government departments and the economic community.  Additionally, they are now the only house prices indices quoted in the Reserve Bank’s chart packs.

We would presume these groups use our measure of housing market conditions because they are the timeliest and most accurate measures available.

Tim Lawless is national research director at RP Data.