The following section introduces the reader to the main methods used by the various house price indices. An understanding of the methodology will be useful when trying to understand the merits and shortcomings of the various indices.
Difficulties in Measurement
Measuring property prices differs from measuring the prices of other assets because the special characteristics of the housing market mean that both the choice of sample data and unit of analysis will have an impact on the index results:
- Houses are heterogeneous. No two properties are identical; they will invariably differ in location.
- Prices are negotiable. The price of a property is not fixed and can change throughout the transaction process. This means that the we can only know a house's market value after it has been sold.
- Property sales are infrequent. Only between 3 to 7 per cent of the housing stock changes hands every year - this means the average house is sold approximately every 14 years. As a consequence, available sales data for a certain property are on average 7 years old and consequently of limited use.