Long run housing stock series - background and methodology

This note explains the RBNZ long-run quarterly private sector residential dwelling value series first disseminated in May 2005. Since its initial May 2005 dissemination, this note and related data have been updated to take account of further backdating by Quotable Value Ltd (QV) of the newly-introduced ‘all residential HPI’ released late in July 2005.

Private sector dwelling stock value

The Bank contracted QV to provide it with total residential dwelling stock values at March from 1995 to 2004 and for December 2004. QV was able to provide these values following its adoption at December 2004 of new methodology for calculating the house price index (HPI) that fully weights sales values in the indexation process.

QV also provided dwelling values for both public and private sector ownership as at December 2004, but was unable to do so for earlier periods. The December 2004 data record public sector dwelling values (Housing New Zealand Corporation, residential dwellings owned by the Crown and local authorities) at around 3% of total residential dwelling value.

For quarters prior to December 2004, in the long-run series derived by the Bank, 3% has been deducted from March quarter total values provided by QV from 1995 and those calculated by the Bank for earlier quarters. From December 2004, private sector dwelling values are as calculated by QV.

Linked house price index

For the reference date of December 2004, QV introduced a new HPI, which includes flats and apartments. It now provides two quarterly ‘house price’ indices – the long-run ‘detached houses’ HPI and the new one including flats and apartments (the ‘all residential HPI’). This broader index has been backdated by QV on the new methodology to December 1989. For the purpose of calculating a backdated quarterly residential dwelling value series, the Bank uses the new index from December 1989 linked to the long-run HPI for periods prior to that date. This derived linked index and the two QV series are contained in the housing values Excel workbook available under the ‘Key graphs’ section.

Dwelling values from March 1995 to December 2004

For the 1995 to 2004 period for which QV provided March quarter total residential dwelling values, the Bank has fitted interpolated quarterly values. This has been done using the linked all residential HPI, SNZ dwelling consent data and average total dwelling sales prices obtained under contract from QV.

Dwelling values from December 1978 to December 1994

For quarters prior to March 1995, the backdated residential values series has been calculated as follows, using the December 1994 calculation as an example.

The March 1995 quarter QV value is first reduced by the estimated value of new residential dwellings added in the March 1995 quarter. For the purposes of this series, this value is the product of the number of residential dwelling consents in the December 1994 quarter times the average sales price of all dwellings in the March 1995 quarter (ie, consents are lagged one quarter). The value of the existing stock of dwellings at December 1994 is then derived from the linked all residential HPI. It should be noted that the value of dwellings measured by QV at March 1995, which includes lifestyle and purpose-built rental properties, is backdated by a linked ‘all residential’ HPI which does not include a lifestyle property component.

Backdated values are estimates

The Bank has backdated this private sector residential dwelling series on a number of assumptions referred to in this note. Data provided are rounded to billions of dollars and prior to December 2004, except for March quarters from 1995 to 2004, should be regarded as estimates. Also, the aggregate values are net of chattels, which are assessed by QV as 5 percent of the gross reported sales price if a chattels value is not provided with the sales record. It is likely this chattels estimate slightly exceeds the average for properties with reported chattels values, and that the aggregate dwelling value is therefore marginally understated.

The residential value data for March quarters from 1995 to 2004 and for December 2004 onwards have been obtained under a contract with QV. Quotable Value Ltd’s data quality standards restricted the period for backdating to 1995, and to March quarters only. QV also considers the publicly- and privately-owned split for residential dwellings to be sufficiently robust only from December 2004. The Bank has cross-checked the publicly-owned dwelling values and considers the December 2004 result adequate for the purpose of deriving a long-run private sector residential dwelling series. The QV result at December 2004 of 3% for the share of publicly-owned residential dwellings of total residential dwelling values, used for backdating, will be different from the actual ratio in earlier years. The Bank does not consider this difference is likely to be material in the context of the overall estimation process for the privately-owned residential dwelling series.

Prior to dissemination of this quarterly residential dwelling value series, the Bank provided annually a December quarter estimate of the value of the aggregate housing stock for the purpose of disseminating its household wealth series. The values disseminated now are about 15% greater than those previously estimated.

July 2005