Improving Median Housing Price Indexes Through Stratification
35 Pages Posted: 22 Jan 2007
Date Written: January 2007
There is a trade-off between how easy a housing price series is to construct and the extent to which it adjusts for changes in the mix of dwellings sold. Median house price measures are easily calculated, frequently used by industry bodies and quoted in the press. However, such measures provide poor estimates of short-term changes in prices because they reflect changes in the composition of transactions as well as changes in demand and supply conditions.
Based on a database of 3.5 million transactions in the six largest Australian cities, we demonstrate that compositional shifts between higher and lower-priced parts of cities can account for much of the noise in median price measures. Accordingly, we propose a simple method of adjusting for compositional change through stratification. Our measure differs from those commonly used internationally as we group neighborhoods or small geographic regions according to the long-term average price level of dwellings in those regions. The measure of price growth produced improves substantially upon a median and is very highly correlated with regression-based measures.
Keywords: housing, housing prices
JEL Classification: G12, R31
Suggested Citation: Suggested Citation