New daily index shows Aussie home values rose 0.8% in February: Christopher Joye

After several years of research and development, Rismark and RP Data, in conjunction with the Australian Stock Exchange (ASX), have announced this morning two global firsts in the closely followed housing space:

(1) the launch of the world’s first genuine “daily” house price index suite, which will cover all the major cities and the national market and will be quoted by the ASX as a precursor to the development of exchange-traded products, such as house price index-linked “futures”; and

(2) the launch of house price indices that track the change in the value of the overall asset class (known as the “stock”) rather than simply being limited to the 5% to 6% of all homes that transact each year (called the “flow”).

Based on their new daily hedonic home value index, RP Data-Rismark report that dwelling values across Australia’s eight capital cities rose 0.8% in the month of February, although due to a slump in the seasonally slow month of January year-to-date dwelling values are still soft-to-sideways (-0.2%).

Encouragingly, in the month of February, dwelling values rose 0.8% in Sydney, 1.8% in Melbourne, 1% in Adelaide, 2.2% in Hobart, 5% in Darwin, and 1.9% in Canberra. The only cities to record falls in home values in February were Brisbane (-0.1%) and Perth (-1.8%).

These ASX-quoted daily house price index products should improve the accuracy and timeliness of the information available on Australia’s largest investment class, residential housing, which is valued at $4 trillion in total. They will also offer us the first historical insights into what happens to house prices on an “intra-month” basis.

In the ASX’s release today, Rismark’s Ben Skilbeck said, “RP Data-Rismark’s daily index is specifically designed for ‘trading’ purposes and tracks the value of an investment in a self-financing portfolio of dwellings. The index removes biases from renovations, alterations and additions so as to examine true changes in market value. The daily indices also address the compositional biases that plague ‘median’ and ‘repeat-sales’ techniques.”

Analysts in this area will recall that most house price indices currently report on a quarterly frequency. Rismark and RP Data broke ground by publishing a low-volatility monthly “hedonic” house price index back in 2006, which has been embraced as the leading benchmark by the RBA and bank economists.

Bill Evans, chief economist of Westpac, commented, “RP Data-Rismark are the RBA’s ‘preferred data analysts’ for house prices,” while CBA’s Craig James said, “RP Data-Rismark’s index has emerged as Australia’s authoritative source on home price trends”.

But the notion of accurately tracking daily movements in Australia’s most talked-about asset class is a potential game changer. As the first chart below shows, the new daily index moves in a generally similar fashion to the old monthly version when calculated over the long run (in this case since 1995).

However, on an “intra-month” basis the daily index opens up fluctuations in house prices that frankly nobody has ever been exposed to before. This is highlighted by the second chart below, which compares the daily index with its monthly predecessor, but this time sampling daily and monthly, respectively. Observe how the monthly index looks like a smoothed version of the daily.

Throughout history researchers have been restricted to “low-frequency” house price proxies that look like the red line in the above chart. Around the world, house prices are typically reported with a one-month to four-month lag. Even in Australia, RP Data-Rismark’s old benchmark was reported with a one-month lag while the ABS publishes on a quarterly basis one month after the end of the quarter.

Going forward, we will get daily updates on movements in Australian home values. Will this open us up to the wild swings associated with the share market? The short answer is: no.

In the final chart I’ve compared daily changes in the S&P/ASX 200 share market index with RP Data-Rismark’s new benchmark. This puts into striking perspective questions about the volatility of the new daily measure, which, as you can see, is substantially less variable than its listed equity equivalent.

The differences in the chart above accord with what we understand about housing as an asset class more broadly: once you diversify at the national “index” level, volatility is very low and a fraction of the riskiness of equities. Of course, it’s not very easy to invest in a house price index. That is precisely why the ASX has got involved.

ASX product development manager Brian Goodman said today that the exchange is investigating “the creation of exchange-traded products with the objective of allowing investors to replicate the performance characteristics of Australian residential property. The ability to obtain and optimise residential property exposures with an exchange-traded product will enable investors to efficiently manage exposure to this asset class.”

“The RP Data-Rismark indices overcome a number of shortfalls present in existing indices and in so doing support ASX’s longer term product development objectives” Goodman said.

One obvious question is: how did they do it? The technology underlying the new daily index is sophisticated, and, if you are really interested, you can read three different papers on it here.

The daily index leverages off the fact that in Australia all homes sales are collected and reported by valuer-general’s offices – i.e., we don't have “small sample” biases like the US or UK – and RP Data’s enormous financial investment in extra data-gathering.

The simplest explanation as to how the index works is this. First, RP Data has very detailed information on 99% of all Australian homes, including the exact address, land size, property type, historical sales prices paid for the property, its distance to the local GPO, listing information for the home and like dwellings in the area, its number of bedrooms, bathrooms, and car spaces, and whether the property has things like a pool or a tennis court. In addition to this information, RP Data captures, on average, about 1,400 new home sales every day.

For the purposes of the daily index, RP Data and Rismark have taken a portfolio of around 5 million capital city homes across Australia, and all of the specific attribute information that pertains to them, and used the flow of incoming sales data to re-price the portfolio.

This is similar to the way most financial market indices work. Consider the ASX’s All Ordinaries Accumulation Index. This includes every company listed on the ASX. Each company has a weighted contribution to the index. As new sales data is received, the company’s price is updated, and the index changes accordingly.

RP Data’s Tim Lawless adds, “The daily index production is reliant on timely updates from RP Data’s core database of more than 170 million property records. It has been independently audited and is calculated every day on RP Data’s secure servers.”

Researchers will want to ask obvious questions, like: how do the returns differ over time between the two methods; is the new index more volatile than the daily index; and why don't you seasonally adjust the ASX indices?

Analysis of the new and old indices shows that both their monthly volatility and average annual returns are very similar (e.g., over the last few years, monthly volatility for the daily index has been 0.84% while the old index’s volatility was 0.83%).

This is important. As the first chart above shows, the daily index does not tell us anything especially new about the low-frequency direction of Australian home values over the last 15 years.

It will, however, give us important new insights into weekly, fortnightly and monthly changes in national home values on a daily, rather than a one-month-lagged, basis.

On the question of seasonal adjustment, RP Data and Rismark are currently undertaking a detailed review of the methods they use for controlling for seasonality in house price movements. Upon completion of the review, they will commence publishing a seasonally-adjusted ‘analytical series’, much like the ABS does with its inflation data.

However, as is the case with financial contracts traded on inflation (or any other asset for that matter), the “tradeable” index will track actual or “true” changes in home values, rather than a statistically smoothed series.

Christopher Joye is a leading financial economist who serves as a director of Yellow Brick Road Funds Management and Rismark International. Christopher was actively involved in the development of the daily indices during his time as an executive of Rismark.