House price indices are popping up like For Sale boards on a show day. Most banks have one and more and more property analysts are developing their own indices to serve clients and investors. So what exactly is a house price index and what purpose does it serve for the average Joe who’s trying to determine whether he’s paying too much or has struck a bargain?
The question is how robust is the index? A typical bank index is usually based on the number of bond applications received. A bank’s house price index might not be accurate if the bank’s market penetration is low. The “non-banking” indices are those developed by property economists and companies like Lightstone, which draw on Deeds Office data.
Doret Els, an economist from Efficient Group, says indices like those done by Lightstone are thorough. “Considering that they look at the Deeds Office data makes a difference. Banks won’t reflect un-bonded transactions.” That said, Els says there is generally not too much difference between Lightstone and the banks’ reports.
Els says that if she were looking to buy, the ABSA House Price Index would be the one she would look at because ABSA has historic data and the lion’s share of the market.
Don’t panic at the sight of a house price index, says Els. “It really shouldn’t intimidate home owners or prospective buyers. At the end of the day it’s really just like any piece of economic data – full of averages and trends. The most important thing is to use it as a benchmark when you’re looking at a house in a particular region. The house price index is not the gospel. There are many things that can influence your home’s value. For example, things like location and whether or not you have a good view can make your house price more resilient.”
Els says that one interesting thing that these reports do show is that the size of a home can be a major strength. “The price on smaller homes has proved to be more resilient.”
One rated tool for comparing house prices is the SA Property Transfer Guide or SAPTG, accessed via subscription on www.saptg.co.za
For the dummies among us, house price indices essentially compare two values where the difference is expressed as a percentage. An index is calculated over a fixed period. For example you compare the value of a house in January 2006 (say R1 million) with the value a year later (say R1,1 million). This indicates 10% growth. Over time this shows you a trend. Sometimes the trend in combination with other factors, like supply and demand, may convince you of what is going to happen in an area. If you want to predict how the market is going to behave you have to look at how it behaved when situations similar to the present happened in the past.
The brains at SAPTG explained that for home owners invested in their properties for the medium- to long-term, indices are not that important. For a buyer or a speculator with several properties in different areas, the index assists in making decisions. With every index consider the context in which it was done.
How to Use a House Price Index
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