The Real Estate Institute of New Zealand (REINZ) has introduced a new house price index (HPI). It improves on the previous index by better accounting for the quality-mix of real-estate sales. The quality-mix of houses sold will differ from period to period, making it difficult to unpick whether price changes reflect genuine movements in underlying house prices or simply changes in the quality-mix of houses sold.
The previous REINZ house price index accounted for the quality-mix by stratifying houses in a suburb into deciles by median sales price and then calculating an overall volume-weighted median for the suburb. This accounted for quality-mix in a summary way. Because of unavailable data, however, it could not account for the individual attributes that make up quality, such as land area, floor area, and number of bedrooms.
Now REINZ has detailed quality data and has produced the new HPI in partnership with the Reserve Bank of New Zealand (RBNZ). The RBNZ tested three methods to construct the HPI and selected the sales-price to appraisal ratio (SPAR) method.
The SPAR method uses the appraised rateable value as a base for each house sold. The appraised value accounts for quality attributes. The SPAR method calculates the ratio of the sales price to the appraised value for each house sold. The HPI index in a location is calculated directly as the mean of these ratios for all sales in a given period.
The SPAR method is clear and transparent and relies on appraised valuations. This reliance is also a weakness of the method, since the quality and consistency of the property valuations may not be precise. For example, appraised valuations may not accurately reflect major repairs or depreciation in a property over time.
The HPI is based on sales as they occur, so that it is up-to-date. It records sales prices at the time of unconditional sale rather than at the time of settlement. The HPI can be split out to focus on particular quality attributes so that we can compare the same types of house in different suburbs across the nation.
In its June Monthly House Price Index Report, the REINZ reports that for May, the HPI indicates that housing market activity nationwide year-on-year has lifted 5.0%, up in Auckland by 1.8% and up 11.1% for the rest of New Zealand.