Improving Median Housing Price Indexes through Stratification

Nalini Prasad and Anthony Richards

Journal of Real Estate Research, 2008, vol. 30, issue 1, 45-72

Abstract: 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 media. 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. This study uses a database of 3.5 million transactions in the six largest Australian cities to demonstrate that compositional shifts between higher- and lower-priced parts of cities can account for much of the noise in median price measures. Accordingly, a simple method of adjusting for compositional change through stratification is proposed. The measure differs from those commonly used internationally, as neighborhoods or small geographic regions are grouped 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.

Date: 2008
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DOI: 10.1080/10835547.2008.12091213

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