# QV quarterly house price index

This note was provided by Quotable Value Limited to the Reserve Bank

The QV Quarterly House Price Index measures the movement in house prices for local council areas throughout New Zealand, providing an indicator of capital growth and how prices are trending in an area. The report also allows for a direct comparison between areas of the country.

There are two variations of the QV HPI which differ by the types of property being included:

1. Houses
2. Houses and Flats

# House Price Index Changes

For periods after September 2004, the QV House Price index will be released after a 3 month time lag, rather than the current 1 month time lag. This will enable the House Price Index to incorporate more complete sales activity, further increasing the statistical integrity of the House Price Index.

The quarterly house price index has been rebased to 1000 at December 2003. The rebased index figures for March and June 2004 are directly comparable to the currently available figures for these periods, while the quarterly house price index will be calculated based upon a new methodology for periods after September 2004.

The new calculation methodology will provide a more robust measure of house price growth, as marginal data errors will not accumulate over time, and the index will have a higher degree of accuracy as the later release of the report will enable QV to release final figures rather than provisional.

The new calculation methodology for the quarterly house price index is explained below:

# House Price Index calculation methodology for periods after September 2004

In this example the current period is the December quarter and the previous quarter is September.

For the current quarter assume there were 4 sales.

 Sale Price 203,000 150,000 283,000 290,000 Total=\$926,000 Capital value 185,000 140,000 260,000 265,000 Total=\$850,000

The ratio of total sales price to total capital value is \$926,000 / \$850,000 = 1.0894

In the above sales sample for December, the ratio shows the sales price level is 8.94% above capital value.

The above ratio can be used to produce a new total current valuation of houses for the whole local authority as at the current quarter.

Assume the total valuation of houses as at valuation date = \$3,259,357,000 and the total number of houses is 14,233.

Using the ratio from the above sales sample, the total current value for housing stock at the current December quarter can be worked out as:

\$3,259,357,000 x 1.0894 = \$3,550,743,516 and the average current value of the housing stock as \$3,550,743,516 divided by the number of houses (14,233) = \$249,473.

Assume that a similar exercise for the September quarter produced a ratio of 1.0541. When following the above procedure to work out the total and average valuation for the local authority, for the previous September quarter the current valuation can be worked out as \$241,389.

The % change in average current valuation for the local authority is used to create the price index movement.

Average current valuation for September quarter = \$241,389
Average current valuation for December quarter = \$249,473

The % change in the index is \$249,473 / \$241,389 = 3.35

### Total New Zealand index, Auckland and Wellington areas

For index areas that combine local authorities like Total New Zealand, the total current valuations of the relevant local authorities are combined and used to calculate the current average valuation for each quarter. These current valuations are then used as above to calculate the price index.

When a local authority is revised no adjustment to the index is required. This is because the ratio is always worked out using the latest valuations and will therefore relate to the latest valuation figures for each local authority.

# Previous Method of Calculating Price Index

The previous method used until the September quarter 2004 is as follows:

 Current Index = Previous Index x Current Average Price Value Ratio Previous Average Price Value Ratio
 Where: Average Price Value Ratio = Sum of Price Value Ratios Number of Sales

Example:

Assuming
* the previous Price Index was 2385
* there were five sales in the current period as follows

 Sale Price 120,000 125,000 85,000 80,000 110,000 Total Government Valuation 90,000 118,000 85,000 85,000 125,000 Price/Value Ratio 1.33 1.06 1.00 0.94 0.88 5.21

* there were four sales in the previous period as follows

 Sale Price 110,000 120,000 75,000 95,000 Total Government Valuation 130,000 125,000 65,000 90,000 Price/Value Ratio 0.85 0.96 1.15 1.06 4.02

then total Current Period Average Price/Value Ratio = 5.21 / 5 = 1.042

the Previous Period Average Price/Value Ratio = 4.02 / 4 = 1.005

therefore the Current Price Index = 2385 x 1.042 / 1.005 = 2473

The price movements for each local authority or part local authority were then combined to form the area, regional and national totals. The price/value movement in each local authority were weighted by the moving average of the total sale price from previous periods. This weighting evened out fluctuations in the total sale price and provided that areas with large volumes of sales at high prices had more effect on regional and national figures than those areas that had small volumes of sales at low prices.

Allowances were made for local authorities being revised (that is, new Government Valuations being issued) at different times and for the transitional period when new Government Valuations came into effect.

© Quotable Value Limited, May 2005