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EXPLANATORY NOTES


INTRODUCTION

1 This publication provides estimates of changes in house prices for each of the eight capital cities of Australia. The information is presented in the form of price indexes constructed separately for Established Houses and for Project Homes (see below for definitions). It is calculated on the reference base 2003-04 = 100.0 for each of the eight capital cities as well as a weighted average of them. The capital city indexes measure price movements over time in each city individually. They do not measure differences in price levels between cities.

2 The index for Project Homes is compiled for use in calculating the House purchase expenditure class of the Consumer Price Index (CPI). The index for Established Houses (referred to from now on as the HPI), while not contributing to the CPI, is compiled and published along with the Project Homes index in recognition of the widespread interest in information specifically relating to housing prices.

3 To assist in the analysis of housing price movements at the national level, aggregated series have also been compiled and are presented in tables 5 and 6 along with series for prices of materials used in house building, construction industry hourly rates of pay and private housing investment. For information on the derivation of series in these tables see paragraphs 23-29.

4 Table 7 presents a city-wide median price (unstratified) of house sales data available from the State/Territory Land Titles Office or Valuers-General (VGs) Office in each capital city. These median prices are ‘raw’ medians from the available data set and quarterly changes in them will not concord with the published HPIs for each city which are compiled in strata and weighted by the value of housing stock. Numbers of established house transfers recorded each quarter by the VGs are presented in Table 8.

5 For more detailed information on house price indexes than is provided in these explanatory notes refer to the ABS Information Paper, House Price Indexes: Concepts, Sources and Methods, Australia, 2009 (cat. no. 6464.0).


DEFINITIONS

Established houses

6 The HPI covers transactions in detached residential dwellings on their own block of land regardless of age (i.e. including new houses sold as a house/land package as well as second-hand houses). Price changes therefore relate to changes in the total price of dwelling and land.


Project homes

7 Project homes are dwellings available for construction on an existing block of land. Price changes therefore relate only to the price of the dwelling (i.e. excluding land).


PRICE INDEXES

8 A price index is concerned with measuring pure price change - that is, it is concerned with isolating and measuring that element of price change which is not brought about by any change to either the quantity or the quality of the goods or services for which the index is required.

9 The techniques used to construct a price index for project homes are similar to those used for most other goods. A representative sample of project home models is selected in each city, prices are obtained each quarter and the price movements for each model are weighted together. Constant quality is preserved by calculating price movements on a matched sample basis (i.e. the price movements between adjacent quarters are based on the same models in each quarter). If the specification of an individual model changes substantially or a price is unable to be obtained then that model is excluded from the calculation of price movement. Adjustments are made to raw prices to compensate for any minor changes in specifications.

10 This standard procedure for constructing price indexes is not viable in the case of established houses as the observable prices in each period relate to a different set of dwellings for each period. The challenge is how to utilise prices for a heterogeneous set of dwellings to construct measures of price change for characteristic or homogeneous dwellings.


Controlling for the compositional change effect

11 The ABS uses stratification to control for this 'compositional' effect by grouping (or 'clustering') houses according to a set of characteristics. The finer the level of stratification available, the more similar or homogenous the cluster of houses will be. However, the finer the level of stratification, the fewer the property sales in the period. Therefore, the clusters defined have to balance the homogeneity of housing characteristics and the number of observations required to produce a reliable median price. The lowest level geographical classification that is commonly available across data sets is the suburb. Therefore, suburbs are the building blocks on which the clusters are based.

12 Analysis by the ABS has found that the most effective stratification approach uses two characteristics: the long term level of prices for the suburb in which the house is located, and neighbourhood characteristics of the suburb, as represented by the ABS produced Socio-Economic Indexes for Areas (SEIFA). A new set of clusters produced with this stratification method was introduced in the December quarter 2008 issue of 6416.0, together with updated housing stock weights derived using quantity data from the 2006 Census of Population and Housing. The link period for these changes was March quarter 2008. Therefore, only the index numbers from June quarter 2008 onwards reflect the new weights and stratification. The new approach is a refinement of the previous stratification method, which was based on structural attributes of dwellings within suburbs, the physical location of the dwelling, and neighbourhood characteristics of suburbs.


Benchmark and Leading Indicator series

13 Though a complete coverage of property sales data can eventually be obtained from VGs, this data is not available on a timely basis for the most recent quarters. As a result, the ABS has adopted a two-stage approach to produce the HPI to allow the compilation and publication of a more timely estimate of price change. The first stage is to compile the benchmark series based on the complete, or near complete, VGs dataset for each quarter. This will be the third most recent quarter in any publication. The second stage, referred to as the leading indicator series, involves compiling price indexes for the two most recent quarters based on a combination of mortgage lenders’ data and the VGs data available at that point in time. It should be noted that for Darwin, mortgage lenders' data is combined with VGs data for the most recent quarter only.

14 The index numbers for the leading indicator series are preliminary estimates and are revised as more data are progressively received from VGs. These index numbers are labelled with a "p" indicating a preliminary estimate. The benchmark series (labelled with an "r" if it has been revised since the previous quarter's leading indicator estimate) are final estimates and will not be subject to further revision once published.

15 The revisions to price indexes and percentage changes are reported in Table 9, Revisions to Established House Price Index Series, Australia. This table displays, for each time period, the preliminary and final estimates, and the corresponding annual and quarterly percentage changes. The table also displays the size of the revisions made to preliminary estimates of house price index movements.

16 The columns titled 'Difference between final estimate and first and second estimate' are calculated by subtracting the initial estimates from the final estimate. Consequently, no revisions information will be available until a final estimate has been published. As the HPI series was first published with respect to September quarter 2005, the first period for which preliminary data can be compared with final data is June quarter 2005. No preliminary estimates exist prior to this period.

17 Revisions to the weighted average of eight capital cities are included in this publication. Revisions made to each of the individual capital cities are available on the ABS website <https://www.abs.gov.au> (refer to the time series spreadsheets under the 'Downloads' tab for House Price Indexes: Eight Capital Cities (cat. no. 6416.0)).


Available data

18 Price information for project homes is obtained each month from a sample of project home builders in each capital city. Sales prices of established houses are obtained from VGs and home mortgage lenders, and are based on the exchange date of the sales. The exchange date most closely approximates the time at which the market price is determined. Exchange date information is available for all cities except Adelaide and Darwin. For these cities, a modelled exchange date is used.

19 The delivery of VGs data relating to exchange date is delayed by the normal contract settlement and reporting processes. It is only possible to publish reliable house price movements based solely on VGs data after approximately six months.


LIMITATIONS OF HOUSE PRICE INDEXES

20 The reliability of each index is largely dependent upon the availability of sufficient pricing information each quarter. While not a problem for project homes, difficulties are sometimes encountered when compiling the HPI. Although the HPI clusters have been defined to balance the homogeneity of housing characteristics and the number of observations required to produce a reliable median price, the number of price observations available depends on market activity in each quarter and there may be occasions when clusters have low numbers of price observations. This is most apparent in the established house price indexes for the smaller capital cities (Hobart, Darwin and Canberra).

21 The series most affected by limited market scope is the Darwin established house price index. As can be seen from the data in Table 8, the series for Darwin is affected by a relatively low number of transactions in any quarter. Rather than suppress publication, the series are included here because it is believed that the long term trends are reliable. However, because of the limitations in the reliability of individual quarter-to-quarter movements, users are advised to exercise due care when analysing such movements.

22 It should be noted that when the number of price observations available for a cluster is nil or extremely low in a quarter, a price movement for the cluster is derived using imputation methods based on price movements of other clusters.


NATIONAL HOUSE PRICE AND OTHER INDEXES

23 These series are presented to facilitate analysis of price movements at a national level. Although coverage is not strictly national in all cases, this does not significantly impair their usefulness. The derivation or source of each series is set out below.


Established houses

24 The series for established houses is derived by weighting together the indexes for each of the eight capital cities according to the relative value of housing stock in each capital city. From the June quarter 2008 onwards, the values were obtained by combining 2006 Population Census house counts with March quarter 2008 mean prices. Prior to this, the values were obtained by combining 2001 Population Census house counts with March quarter 2002 mean prices. It is important to understand that in the compilation of this index (and other fixed weighted indexes) it is not the housing stock values that are held constant from period to period. What is held constant is the quantity (e.g. number of houses) underpinning these values.


Project homes

25 The series for project homes is derived by weighting together the indexes for each of the eight capital cities. The city weights are derived as the value of additions to the stock of houses in the city, calculated using average price data derived from the Building Activity survey and quantity data from house counts recorded in consecutive Population Censuses. As extensions and renovations are conceptually part of the CPI expenditure class, their value is included in the calculation of the weights. No prices specifically relating to these activities are collected as their prices are assumed to move similarly to those of new houses.

26 Although the capital city price indexes for project homes are compiled for use in calculating the House purchase expenditure class of the CPI, price movements exhibited in the published CPI series are not comparable to those published with the established house price index because the CPI for house purchase is a broader aggregate which also covers fixed appliances and an adjustment for government subsidies directly related to house purchase.


Materials used in house building

27 The index for materials used in house building is that published for the weighted average of the six state capital cities in Producer Price Indexes, Australia (cat. no. 6427.0), re-referenced to 2003-04 = 100.0. For more information on this index refer to Producer and International Trade Price Indexes: Concepts, Sources and Methods, 2006 (cat. no. 6429.0).


Construction industry total hourly rates of pay

28 The index for the construction industry total hourly rates of pay excluding bonuses, private and public, is that published in Labour Price Indexes, Australia (cat. no. 6345.0), re-referenced to 2003-04 = 100.0 for ease of comparison with other series. For more information on this index refer to Labour Price Index: Concepts, Sources and Methods, 2004 (cat. no. 6351.0.55.001).


Private Housing Investment

29 The index for private housing investment is the annually-reweighted chain Laspeyres price index for private capital expenditure on new and used dwellings, as used (but not separately published) in Australian National Accounts: National Income, Expenditure and Product (cat. no. 5206.0), referenced to 2003-04 = 100.0. For more information on this index refer to Australian National Accounts: Concepts Sources and Methods, 2000 (cat. no. 5216.0).


Established house transfer prices and counts

30 As well as the price indexes based on stratified weights for each city, the ABS publishes the median price of all established house transfers, and the number of established house transfers. Both these series are based on VGs house sales data, and are only available for those quarters for which final index estimates are available.

31 The median prices presented in Table 7 are calculated using all available VGs records for each city each quarter, with no stratification or weighting applied. These 'raw' medians will not correspond to the published index numbers and will not produce price movements that are consistent with those numbers.

32 The number of transfers of established houses recorded each quarter by the VG in each capital city is presented in Table 8 to provide an indication of the level of sales activity for the capital city each quarter.

33 As the ABS receives more VGs data, the median prices and numbers of house transfers are revised as necessary. This practice is distinct from the HPI which is not revised once published as a final benchmark estimate, even if additional data are available. Therefore, the HPI, the medians and the numbers of house transfers are calculated from the same set of price information only in the most recent quarter of HPI final benchmark estimates.


ANALYSIS OF CHANGES IN INDEX NUMBERS

34 Each of the indexes presented in this publication is calculated on a quarterly basis with a reference base of 2003-04 = 100.0. In compiling these indexes quarterly, the objective is to measure the change in price levels between quarters.

35 Index numbers are also presented for financial years where the index numbers for financial years are simple (arithmetic) averages of the quarterly index numbers. Index numbers for calendar years may be derived in the same way.

36 Movements in indexes from one period to another can be expressed either as changes in index points or as percentage changes. The following example illustrates the method of calculating index points changes and percentage changes between any two periods: Project Homes: Perth index numbers - March Quarter 2010 156.5 (see table 3) less December Quarter 2009 154.5 (see table 3) equals change in index points 2.0 Percentage change 2/154.5 X 100 = 1.3%

37 In this publication, percentage changes are calculated to illustrate three different kinds of movements in index numbers:

• movements between consecutive financial years (change between average price levels during one financial year and average price levels during the next financial year)
• movements between corresponding quarters of consecutive years
• movements between consecutive quarters.

• Information Paper: House Price Indexes: Concepts, Sources and Methods, Australia, 2009, cat. no. 6464.0
• Information Paper: Renovating the Established House Price Index, Australia, November 2005, cat. no. 6417.0
• Australian National Accounts: National Income, Expenditure and Product, cat. no. 5206.0 - issued quarterly
• Building Activity, Australia, cat. no. 8752.0 - issued quarterly
• Building Approvals, Australia, cat. no. 8731.0 - issued monthly
• Consumer Price Index Australia, cat. no. 6401.0 - issued quarterly
• Housing Finance, Australia, cat. no. 5609.0 - issued monthly
• Producer Price Indexes, Australia, cat. no. 6427.0 - issued quarterly.