http://www.businesstimes.com.sg/real...ex-is-and-isnt

COMMENTARY

What a property index is - and isn't

By Lynette Khoo

[email protected]@LynetteKhooBT

3 Apr


MARKET rumblings have of late been heard each time a key residential price index is published. When URA's revised index showed a 1.1 per cent drop in overall private home prices for the first quarter of this year, market players groused again - not because the revised index didn't do its job of showing the broader trend but because it did not show the movement in prices that some were hoping for.

No doubt, a robust property price index is necessary to provide a sense of where the market is heading. But nowadays, many appear to expect the index to serve their own purposes.

Some developers believe that the index should have shown a bigger fall, reflecting the 10-20 per cent drop in prices that they see in selected projects in the high-end segment. This, they believe, would convince the government to roll back some of its cooling measures.

Potential buyers who were sidelined during the run-up in prices to 2013 are also waiting for an indication of a bigger drop in prices as a signal for them to enter the market, thinking that a larger drop in the index will increase their bargaining power over sellers. But on the other hand, home owners looking to profit from their properties would think that a smaller drop or even a rebound by the index would help justify their asking prices.

When the index movements different groups hope to see do not take place, complaints of the index being inaccurate inevitably arise, with critics citing headline-grabbing deals to back their arguments.

Even among analysts and consultants, there seems to be a divergence in views on what the index is supposed to do. Should the property price index be all things to all people? It doesn't help when different indices sometimes tell different stories. A study by BT showed that between 2008 and now, there were at least seven quarters of conflicting price signals between URA's non-landed residential price index and a similar index by the Singapore Real Estate Exchange (SRX) that tracks the same market.

The wide availability of public information today means that anyone can possibly create an index by running a regression analysis of data points against various attributes affecting property prices. But the devil is in the details: users of the indices should question the robustness of an index methodology and how it accounts for non-arms' length transactions and outlier deals, for instance.

As a general principle, a robust index cannot be skewed by atypical discounts offered to unique institutions or funds that an average person will not enjoy. Neither should it reflect the interest of a small segment of the market.

But users need to also recognise the limitations of indices. No one certainly should make million-dollar decisions based just on readings of a property price index.

No matter how robust an index is, it is not going to reflect every single individual experience on the ground given the heterogeneous nature of properties - with different price dynamics for different projects or locations and each property attribute impacting price differently.

When flash estimates are subject to subsequent large revisions, this should also raise several questions: Is the methodology robust enough to withstand periods of low volumes and outliers? What's the value of flash estimates when the data is not sufficiently representative yet? A sharp 45 per cent plunge in private home transactions from 2013 has also narrowed the sampling size.

With indices providing a rear-view of the market, turning points tend to be visible with hindsight. Given the relative illiquidity of properties as opposed to stocks, it is tough to time the market based on a property price index.

One current concern is that of policy feedback. For instance, if a benchmark index reflects a decline in prices that is smaller than what's happening in reality, some worry that regulators may not be alerted in time to take action to save the market from a hard landing.

But such concerns are probably unwarranted given that policymakers use a wide range of comprehensive information on individual sale and rental transactions to monitor market trends. They would also consider a myriad of other factors to formulate their policies, including interest rates, liquidity, capital flows and market sentiment.

Likewise, consumers shouldn't rely on property price indices alone without understanding market conditions and studying location and project-specific factors. Fortunately, they will soon have more information when URA starts publishing net prices of individual unit transactions.

So what's a property price index good for? Fine as a general guide but don't bet your life savings on it.