Type of Indices

The second class of indices CoreLogic has produced are based on a median and “stratified” median price series. Stratification is a process for creating subsets of houses which are qualitatively similar. Unique price series are created for these subsets which are then aggregated to estimate suburb-adjusted price movements in the overall market. The strata definitions used to classify properties into subsets are based on price, geography, and interactions of these variables. The stratified median index that CoreLogic produces for units and apartments, groups suburbs by their long-term median transaction price. The stratified median index that CoreLogic produces for houses groups suburbs by their long-term price to land size ratio.

Median and stratified median indices are simple to calculate and provide the price of the middle ranking property observed to sell in a given measurement period. Further, rather than selecting the 50th percentile (ie, the median) from whatever properties are observed to sell over a particular measurement period, other percentiles such as the 25th or 75th percentile can equally be selected using the same method so as to create other percentile series.

The major shortcoming of median (or any other selected percentile) price series is that they do not represent changes in the value of the residential property market portfolio. Median prices do not track the same properties through time. In fact, it is highly unlikely that any of the properties observed selling in one period will be the same as the properties selling in the next measurement period when examining quarterly or monthly median price series. By way of example, in one period the median priced house observed may happen to be a three bedroom home and in the next period it may be a four bedroom home. Further, in order to provide useful statistics, one needs to aggregate a sufficiently large numbers of property sales over what can be long periods of time. As such, the publication frequency of median price series is often limited to quarterly, although CoreLogic do offer a monthly median series.

The fact that median or other percentile based series cannot be used to track changes in value of a market portfolio does not make them wrong: it is simply that they have different applications than hedonic indices. For example, median price series are useful in answering economic policy questions relating to housing affordability.

The third type of index estimates the performance of the market by analysing the returns on individual properties for which there are at least two observed sales prices, each at different points in time.

Repeat sales indices seek to control for changes in the composition of properties selling in different periods without requiring any property attribute data (other than address). They do this by only examining properties which have two separate sales records.

The disadvantage of repeat sales indices is that: (i) they only cover between 30% and 50% of the properties in a given city; (ii) new properties cannot be accounted for (and neither can old properties for which there is no prior sales information on record); (iii) improvements to properties cannot be explicitly accounted for; and (iv) there is potential significant sample selectivity bias toward more frequently traded properties (eg, apartments or lower value homes may trade more or less frequently than higher value homes).